E&Y: 2011 Transaction Activity Rises, But Deal Value Declines

The number of mergers and acquisitions (M&A) within the upstream oil and gas sector in 2011 finished slightly higher than in 2010, but the reported total transaction value was down substantially due to market uncertainty.

The number of transactions within the global oil and gas industry rose by more than 5 percent from 2010, but the average deal value was down by 7 percent due to the absence of mega-deals, such as the $42.5 billion asset acquisition by Petrobras in 2011 and ExxonMobil's $40 billion acquisition of XTO Energy in 2009, according to a recent report by Ernst & Young.

More than 1,322 deals for the upstream, midstream and downstream oil and gas sectors were announced last year, up from the 1,258 transactions reported in 2010. However, the aggregate value of oil and gas transactions totaled $317 billion in 2011, down 7 percent from $341 billion in 2010. The year 2010 saw 76 oil and gas transactions valued at more than $1 billion; in 2011, this number declined to 71.

Upstream M&A Dwindles Amid 2011 Economic Uncertainty

While the upstream oil and gas sector remained the most active in terms of deals – with the U.S. and Canada continuing to dominate activity – Ernst & Young noted a fall-off in activity in the second half of 2011 due to growing economy uncertainty, combined with tightening capital markets.

In the upstream sector, 957 transactions were announced versus 947 in 2010, while total transaction value declined 36 percent from 2010 to 2011, Ernst & Young reported.

"Overall, 2011 has seen more cautious transactions with much fewer large deals. There were 38 upstream deals greater than $1 billion in value compared with 55 in 2010," Ernst & Young commented.

Ernst & Young noted that access to debt and equity funding, particularly for the independent sector, is now extremely challenging.

"Ironically, this situation is likely to result in an increase in transaction activity in 2012 as the largely well-capitalized majors and national oil companies exploit their balance sheet advantage," Ernst & Young said.

Asset deals continued to dominate in 2011 due to capital constraints, accounting for 79 percent of deal volume, and unconventional shale plays quickly became the new conventional in 2011 with $66 billion targeted for shale-related transactions.

Super major energy companies alone were involved in nearly $20 billion of disclosed transactions, while national oil companies (NOCs) were buyers for only 6 percent of transactions, with 43 announced upstream deals in 2011. However, NOCs were responsible for 18 percent of announced deal value. Chinese NOCs, who have been actively pursuing oil and gas assets internationally, were responsible for half of NOC acquisition spending last year.

North America remained the most active market for M&A activity, but Europe and CIS exhibited the strongest growth. Canadian activity was down more than 30 percent on 2010 as companies focused more on developing their oil sands portfolios rather than acquiring additional assets. European activity rose 42 percent, with more than half the 108 deals involving North Sea assets.

The downstream energy segment experienced a modest decline in transaction activity in 2011, though overall values were comparable to 2010 levels.

"Ownership change in refining and retail in mature markets continued, stemming from ongoing portfolio rebalance and capital allocation review," said Ernst & Young. "With refined product demand declining in Europe and North America, rationalization is expected to remain on the agenda in 2012."

Meanwhile, the oil field service sector experienced a "very healthy" 64 percent increase in transaction volumes in 2011. Ernst & Young anticipates a positive outlook for transactions in the sector in 2012, underpinned by those seeking new geographies, new customers or new technologies.

"Many of the larger players are well-capitalized and opportunistic, and financial players also remain active," Ernst & Young commented.

Uncertainty surrounds expectations for 2012 with lingering economic and political uncertainty, but activity is likely to exceed admittedly low expectations, Ernst & Young noted.

"We anticipate that capital constraints among the independent sector, combined with well-capitalized large-caps and sovereign-sponsored organizations, will underpin a robust level of transaction activity in 2012," Ernst & Young noted.

Unconventional reserves will continue create interest in 2012, and the rising development costs should sustain the level of investment opportunities coming to market. Frontier exploration for conventional resources in the Arctic and East Africa, which is currently underway, will be closely monitoring, with transaction activity set to follow exploration successes.


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