Oil & Gas M&A Reaches $33.4 Billion in 1Q 2014

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The recent absence of major Chinese involvement and eroding profitability in the oil and gas industry has led to M&A reaching just $33.4B in 1Q 2014, Evaluate Energy reports.

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It does not necessarily reflect the views of Rigzone.

The recent absence of major Chinese involvement and eroding profitability in the oil and gas industry has led to M&A reaching just $33.4 billion in Q1 2014, 28% lower than the average quarterly M&A spend over the past three years. The lower M&A value is also mirrored in the deal count of 205 deals during the quarter (excluding licensing rounds) which is 27% lower than the average deal count by quarter since 2010.

Chinese Companies Uncharacteristically Quiet

Since the start of 2010, state-influenced Chinese companies have been responsible for $95 billion of company-to-company oil and gas deals at an average spend of $5 billion per quarter. In Q1 2014, these companies accounted for only $147 million of upstream deals. It is likely that this relatively low amount of activity is more to do with a timing issue, rather than a shift in strategy from China, especially with Chinese companies rumoured to be interested in acquiring large stakes in the LNG industries of Canada’s west coast and Cyprus during the quarter.

Lower Industry Profitability Feeds Through to Lower M&A Spend

The more significant factor in the relatively lower M&A total is likely to be the continued drop in profits for the upstream industry as a whole. At the time of publication, 200+ companies had reported their 2013 annual results. Using the Evaluate Energy database, it can be seen that the 2013 normalised profits are 25% lower than in 2011 and 16% than 2012. The underlying reason behind the erosion of profits is the escalation of operating and development costs in the oil and gas industry, which haven’t been reflected in the oil and gas price realisations. Therefore, profits and free cash flow have been squeezed and companies have been more tentative with their capex budgets.

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M&A Deal Value and Count by Quarter and Company Type
Source: Evaluate Energy M&A Database

L1 Energy Acquires RWE-DEA in Biggest Deal of the Quarter

Despite the lower than average outlay, the quarter was boosted by the largest deal for the past 15 months when L1 Energy acquired RWE-DEA for $7.1 billion. To find a larger deal than this we have to go back to December 2012, when Freeport-McMoRan Copper & Gold Inc acquired Plains Exploration & Production for $16.3 billion.

L1 Energy is a privately-owned investment vehicle, owned primarily by Mikhail Fridman, the second richest man in Russia. The board can boast the inclusion of the ex-CEO of BP, Lord Browne, and Stan Polovets, the CEO of the Alfa-Access-Renova Consortium, which owned a 50% stake in TNK-BP prior to Rosneft’s acquisition of the company in 2012. L1 Energy will be gaining oil and gas interests in 14 different countries with this acquisition and it is likely that more deals will follow; the company has pledged to invest $20 billion or more in oil and gas assets across the world.

For RWE, the sale comes at a time when company profits – derived in majority from its German utilities business – are being hit by Germany’s preferential treatment of renewable energy that has pushed electricity prices down. This sale is a bid to pay down a portion of its large net debt position.

Canadian M&A Picks Up

2013 represented a sluggish year for upstream acquisitions in Canada with $12.1 billion of deals (versus $47 billion during 2012).  2014 has started more brightly with the second largest acquisition of the quarter and $6.2 billion of acquisitions in total. Canadian Natural Resources reached a deal with Devon Energy to acquire Devon’s conventional assets in Canada, excluding its Horn River and heavy oil properties. The motivation for Devon to divest these assets is the need to pay off debt following the company’s largest ever deal last year, when they acquired the Eagle Ford assets of GeoSouthern Energy for $6 billion. Canadian Natural Resources will be receiving 272 million boe of proven reserves, weighted 70% towards liquids at just $11.47 per boe.

The third largest deal of the quarter also involved two Canadian-listed companies when Baytex Energy acquired Aurora Oil & Gas Limited for $2.3 billion. Aurora Oil & Gas is a company based in Australia but with assets primarily in the Eagle Ford play of Texas. The deal represents Baytex Energy’s entry into the Eagle Ford play; the company is looking to bolster its oil-producing operations in the Peace River and Lloydminster Heavy Oil areas and the North Dakota Bakken and Three Forks plays.

Energy XXI Acquires Fellow Gulf of Mexico Company EPL Oil & Gas Inc

Energy XXI’s acquisition of EPL Oil & Gas and a Central Area Gulf of Mexico licensing round pushed spending in the Gulf of Mexico region to $4 billion during the quarter, accounting for 30% of the total spend in the United States. Energy XXI’s $2.3 billion acquisition of EPL represents an acquisition within their comfort zone in terms of the resources being acquired. EPL Oil & Gas, just like Energy XXI, specialises in oil production around the Gulf of Mexico shelf and coast. In terms of the size of acquisition however, Energy XXI will have to digest a company who has an enterprise value 1.4x greater than Energy XXI’s market capitalisation and will lead to an increase of their already high level of debt that currently stands at 50% greater than their equity value.

In the Gulf of Mexico licensing round 231, most of the headlines centred around BP’s involvement. This round represented the first Gulf of Mexico round that BP could take part in since their federal contracting ban in the wake of the deepwater Horizon spill. Despite the headlines, BP’s $41.6 million outlay represented less than 5% of the total winning bids of $851 million. Freeport-McMoRan Copper & Gold Inc’s involvement represented their debut in any licensing round since entering into the oil and gas sector in 2012 and they ended up being the highest spenders with their winning bids totalling $321 million.

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Top 10 Deals of Q1 2014

This report was created using the Evaluate Energy M&A Database, which has tracked every E&P deal including licensing rounds since 2008. Evaluate Energy also holds financial and operating data for 300+ of the world's biggest oil and gas companies.



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