Transactions defied low oil prices, as investors bet on long-term economics
The pull of the Permian unleashed the big money in a burst of M&A action in 2017. Just three deals in the first quarter alone—ExxonMobil's acquisition of Bass Brothers' properties in the Delaware Basin for $5.6bn, Noble Energy's $3.2bn buy-out of Clayton Williams and Parsley Energy's $2.8bn grab of Double Eagle Energy's acreage, all in the Permian—accounted for the lion's share of asset-buying as the industry raced for promising acreage.
During those three hectic months, M&A in the Permian accounted for $17bn by value, a record. "Buyers were clearly scrambling to get their hands on what they could in the best tight oil play in the world before all opportunities got taken up," wrote Mangesh Hirve, operating chief at 1Derrick, an independent energy research specialist.
Thereafter, although the pace slowed, there were more than enough deals in the second quarter to maintain momentum. By half-year, about $137bn worth of M&A was confirmed across all sectors of the industry—upstream, oilfield services, midstream and downstream—in a remarkable display of industry confidence, albeit mainly in North America.
Nearly all the non-US deals took place in Canada, whose oil sands attracted heavyweight homegrown investors. Canada's Cenovus splashed $13.3bn on ConocoPhillips's oil sands and deep-basin assets, while Canadian Natural Resources acquired Shell's bitumen projects for $8.5bn.
All this happened as oil prices fell by 16%. Just as impressively, as PwC's Doug Meier, deals leader in the US oil and gas sector, pointed out: "Fourteen of the 20 mega deals were all cash, reflecting acquirers' access to cash and their willingness to spend it."
During three hectic months, M&A in the Permian accounted for $17bn by value, a record
But why the willingness? "Despite the recent sub-$50 oil prices, investors are doing deals with a focus on the long-term economics of the assets and businesses," reckoned PwC's Seenu Akunuri, the consultancy's leader in oil and gas valuations. "The expectations revolve around the fact that breakeven costs will likely continue to be lower for longer and hence a price point of around $50 doesn't seem to be a deterrent."
Downstream saw more than its fair share of activity, with Saudi Aramco's and Petronas's $7bn deal the largest in the sector. As well as half of the former's Rapid refinery in the southern Malaysian state of Johor, it gives the Saudi company the right to supply up to 70% of crude feedstock. The biggest midstream deal was Pembina Pipeline's $7.1bn acquisition of Veresen which, according to Deloitte, opened up opportunities for the former in the proposed Jordan Cove liquefied natural gas-export terminal in the US.
As despair about the future of the North Sea was replaced by the realisation that there's still money to be made there, so a new wave of finance-savvy investors moved in. In the UK's part of these waters, Shell agreed a $3.8bn sale of assets to privately owned Chrysaor, and Israel's Delek Group laid down $1bn for the remaining 80.3% share in Ithaca Energy. In the Norwegian Continental Shelf, ExxonMobil booked $1bn from the sale of producing fields to Norway's Point Resources.
In a nod to the future, the backers in the Point Resources deal included HitecVision, a private-equity investor specialising in the industry. According to a consensus of consultancies, the involvement of these investors illustrated the growing appetite of alternative finance for oil and gas assets. As Deloitte pointed out, "private equity has become active during the period". Yet these are high-tech financiers and their money came with strings attached. 1Derrick's Hirve commented that "internationally, deals crossed the finishing line with transaction structures that included payments contingent on milestones and oil prices and kept some decommissioning liabilities with the sellers".
As the year advanced, there was more action, with Wood Group's $2.9bn takeover of service firm Amec Foster Wheeler in early October. In Latin America, Argentina's more liberal oil and gas regime was estimated to have attracted more than $6.6bn by the end of 2017. By the fourth quarter, the cumulative value of M&A deals crossed $122bn, according to 1Derrick.
This article is part of Outlook 2018, our annual book looking at energy market trends for the year ahead. To purchase a copy, click here