Oil and gas M&A set for revival
With oil and gas companies' balance sheets in better shape and some prime assets back on the market, corporate activity is set to accelerate, writes James Gavin
THE OIL and gas mergers and acquisition (M&A) market is showing signs of life after a year of hibernation. While frozen capital markets and depressed energy prices during the recession caused a slow-down in M&A activity, many companies embarked on efficiency drives or simply held on to their cash.
But the combination of cheap asset valuations, higher and more stable energy prices, and improving balance sheets is stimulating corporate deals. In late 2009, ExxonMobil launched a $41bn take-over of US shale-gas specialist XTO (see p4). Shortly afterwards, Total agreed a $2.25bn joint venture with the US' biggest gas producer Chesapeake Energy, in Texas' Barnett Shale. In exchange for a 25% share of Chesapeake's upstream Barnett Shale assets, the French company will pay $0.8bn in cash and supply a further $1.45bn to fund 60% of Chesapeake's drilling and completion costs.
A year ago, commodity prices were low and volatile – making price projections and asset valuations difficult, points out Marc Folladori, a partner in law firm Mayer Brown's global energy practice. But now that oil prices appear to have stabilised in a $70-80 a barrel range "people are comfortable that volatility has ceased."
More assets are set to become available because of a growing inclination among oil companies to focus capital spending on core business areas. "We expect the M&A market to be driven by continued corporate consolidation and asset transactions as companies rationalise their portfolios post-consolidation," says Brian Lidsky, managing director, research, at PLS, which publishes information on global energy M&A deals.
According to a PLS M&A survey for the fourth quarter, there were 172 transactions, with deal value amounting to $75bn (see Table 1). That compares with 112 deals in the third quarter, with a cumulative deal value of $21bn. The fourth quarter included 10 deals in excess of $1bn – eight involving oil firms and two involving gas companies. The trend appeared to continue last month, when the US' Noble Energy launched a $494m cash acquisition of Suncor's upstream oil and gas assets in the Rocky Mountains region.
Divestiture programmes are likely to figure prominently this year. ConocoPhillips and Devon Energy both want to sell assets. ConocoPhillips is divesting 10% of its portfolio; US independent Devon is selling its international and Gulf of Mexico assets. Devon also wants to place an additional $4bn-6bn worth of assets on the market, with the proceeds to be spent on building up its onshore US portfolio.
Deal appetite stretches beyond North America. In Europe, Norwegian companies Aker Exploration and DNO completed a merger in late December. Asian national oil companies (NOCs), eager to increase their access to oil reserves, are also likely to re-emerge as strong contenders for assets. South Korea's Korea National Oil Corporation agreed to buy Canada's Harvest Energy Trust for $1.7bn in October and is on the hunt for other global deals. In December, it acquired Kazakhstani oil producer Sumbe for $335m.
Well capitalised integrated oil companies are among the likely buyers because they should find it easier to tap debt markets for funding. Debt funding is generally more available now for M&A deals than it was six months ago, although access to capital is yet to recover to pre-recession levels. Nonetheless, greater flows of capital into the energy sector reflect a growing appetite for risk. Independents that spent the last year focusing on efficiency should now have cash available for M&A, says Deloitte, a consultancy. Those short of cash will be acquisition targets.
There are other indications that investors' appetite for risk is growing. In December, Cobalt International completed an initial public offering that valued the firm at $4.5bn. "It's an interesting deal," says PLS' Lidsky, pointing out that Cobalt has a "great management team" – made up of deep-water specialists from BP and Unocal – but no proved reserves or production. A year ago, funding for exploration was scarce.
Deals are also expected in west Africa, although ExxonMobil's ambitious $4bn bid to acquire a large stake in Ghana's deep-water Jubilee field came unstuck in October, reportedly because of competitive pressures (PE 12/09 p18).
Back in North America, the exploration and production and oilfield services sectors are likely to become more active in 2010. "Oilfield service companies see this is a time to consolidate – to build out their product and service offerings by buying other oilfield service companies at advantageous prices," says Folladori (PE 12/09 p21).
US unconventional assets, such as shale gas, may also witness a burst of new transactions. "To develop these plays fully requires tremendous amounts of capital, so we expect the majors and NOCs to step up and enter these positions, whether through acquisitions or joint ventures," says Lidsky.
Ernst & Young, a consultancy, says a return to the rapid pace of deal flow seen in the 2006-08 period is unlikely. And successful transactions are likely to include a high proportion of joint ventures involving smaller to medium-sized companies. Yet there is a growing view that oil and gas sector M&A is recovering. The next quarter will provide a telling indicator.