Analysis: 3Q10 M&A Activity in O&G Sector Surpasses 2009 Levels

Despite ongoing uncertainties about future business in the U.S. Gulf of Mexico and cautious and uneven equity markets, merger and acquisition (M&A) activity in the U.S. oil & gas sector overcame challenges to surpass 2009 levels in the third quarter of 2010.

GUlf OIl Rig

According to PwC US, the increase in oil and gas deal activity is attributed to companies' ongoing effort to reorder their portfolios, continuing interest by non-U.S. oil companies in shale plays, and the expansion of product lines and markets served by equipment and service companies.

Portfolio and Gold COins

PwC reports that, for the three month period ending September 30, there were 39 deals with reported value greater than $50 million (totaling $17.6 billion in deal value) representing an increase of 19.7 percent from the same period last year. In terms of volume, the third quarter of 2009 saw 30 deals, or nine fewer deals, valued at over $50 million, with total deal value of $14.7 billion.

"The oil and gas sector continues to see a strong level of activity, despite lingering uncertainty regarding equity markets, relatively low commodity prices (particularly gas), and uncertainty surrounding relative currency values," said Michael Collier, U.S. leader of the energy M&A practice at PwC.

"Not only are we seeing steady deal flow among corporates in the space, financial sponsors are starting to emerge again and we expect they will be major players this year and next. We're optimistic for the remainder of 2010 and 2011, and the significant backlog of deals in the pipeline is generating a lot of activity."

Person and Graph

A continuing theme from the previous quarter, upstream asset-focused deals dominated deal activity, comprising 71 percent of deal volume and 57 percent of value in the third quarter of 2010. According to PwC, the relatively large volume of asset sales reflects the size of major upstream transactions, particularly in the shale plays.

"There is a healthy level of deal volume around divesting of non-core assets as companies look to maximize their return on capital deployed and raise funds to continue their development efforts, particularly in the shale plays," continued PwC's Collier.

Hand shake, merger

"As for the Gulf, players are in the process of deciding whether they will be in or out, and while the moratorium was technically lifted recently, there is still a de-facto moratorium as permits remain difficult to secure. Drilling activity in the Gulf will take time to fill in, and we're seeing capital budgets being set for 2011 that assume very low activity. Companies are actively working on the decision to either leave the Gulf or ride out the storm."

Of the $17.6 billion in value, 25.7 percent involved shale gas plays, as companies looked to secure their position for the longer term and have access to newly developing technology, according to PwC. "Shales with higher liquid content like the Eagle Ford have been particularly attractive acquisition targets as companies look to take advantage of what many perceive to be a sustained period of low gas prices," Collier stated. In the third quarter of 2010, the average value of deals over $50 million fell to $450 million from an average of $490 million in the same period of 2009, demonstrating oil and gas companies' ongoing focus on optimizing their portfolios.

"While we're seeing an increase in larger deals, the average deal value is not rising; in fact, it declined slightly. This alone doesn't represent a significant trend, except that it's relatively strong for the third quarter, which is historically a seasonally slow time for deals," added PwC's Collier.

For the first nine months of 2010, there were 141 deals, with reported value greater than $50 million, representing $100.4 billion versus 70 deals with $34.9 billion in the first three quarters of 2009 -- a 101 percent increase in volume and a 187 increase in value. "Despite the possibility of tax increases in 2011, we aren't seeing many deals rush to close before year-end," continued PwC's Collier.

"Dealmakers remain conservative and are focused on creating value and avoiding costly mistakes. They are taking their time to make sure the value in the deal is protected, through careful diligence and thorough preparation before signing and close. We're also seeing more attention paid to post-deal performance particularly in the first 100 days.

"As companies emerge from the financial crisis, it is clear they are very focused on operational excellence. The same seems to characterize M&A activities. As we head into the next energy M&A upcycle, it feels as though the bar has been set very high in terms of deal execution excellence."


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