Analysis: Divestitures, Permian Asset Interest Highlight Slow M&A Market

Divestitures among major oil and gas companies and resurging interest in the oil-rich Permian Basin characterized an otherwise slow market in global transactions during this year's third quarter, according to a recent merger and acquisition (M&A) activity report by Houston-based PLS Inc. and partner Derrick Petroleum Services.

"Although the pace of deal-making fell to the lowest level in a year, a healthy volume of deals remains on the market. That should allow 2010 deal-making to finish at the highest level in three years," said Richard Mason, director of research at PLS.

Global M&A activity in this year's third quarter totaled $43.8 billion in 154 separate transactions, compared with first and second quarter totals of $49 billion and $44 billion respectively So far this year, global M&A activity has exceeded $136 billion on 491 transactions and is on track to top $150 billion by year-end.

North America led the global marketplace in third quarter M&A activity with 100 transactions total $18.1 billion, or 41 percent of value by dollar volume. However, deal activity in the United States fell to the lowest level in a year after a blockbuster run during the first half of 2010.

The U.S. recorded $10.3 billion in transactions on 46 deals during third quarter 2010, a 55 percent sequential drop versus the prior quarter. However, the pullback is deceptive since more than $8.0 billion in potential transactions are being shopped in the U.S. market, with expectations of announcement prior to year-end. U.S. transaction value bottomed in first quarter 2009 at $405 million following the 2008 collapse in commodity prices.

Asia was second behind North America with $17.2 billion on a dollar volume basis, following by Europe, including the North Sea, at $4.4 billion, and South America with $2.2 billion. Other regional transaction totals include Australia with $1.1 billion, Africa with $767.6 million, and the Middle East with $40.6 million.

A significant stimulus to third quarter dealmaking was BP's efforts to raise funds to offset damages associated with the Macondo well blow out. BP has divested $8.9 billion in global properties, including holdings in Egypt, Colombia, Canada, and the Permian. BP accounted for 20 percent of global dealmaking on a dollar volume basis during the third quarter. These divesture efforts are still underway, including the sale of BP minority stakes with PDVSA in two Venezuelan oil fields. BP also is shopping its Vietnam assets.

Operators seeking to expand their domestic oil and natural gas liquids portfolio triggered a rise in M&A activity in the Permian Basin, where operators such as Apache Corp. and Concho Resources have acquired assets. Apache picked up BP's Permian assets for $3.1 billion and Concho acquired New Mexico independent Marbob Energy in a $1.65 billion merger. Other significant deals include Linn Energy's $442 million purchase of Wolfberry assets in two separate transactions and Energen's $185 million Wolfberry purchase from Limestone Exploration and its various partners.

Oil-weighted deals accounted for $22.0 billion in transaction volume, or 50 percent of deal value, during the third quarter. So far this year, oil-focused deals represent half of all transactions and have topped $66.2 billion in dollar value. Natural gas-focused transactions at $10.9 billion represented 25 percent of global deals during the quarter, down from the torrid pace seen earlier this year. Deals involving a mixed commodity base generated $10.9 billion in volume, or 25 percent, a level seen in the prior quarter.

Transactions in unconventional resources dropped significantly during the third quarter to 21 deals totaling $3.5 billion after a strong run in the first half of this year. Dollar volume fell 73 percent in comparison to the $12.9 billion in transactions involving unconventional resources during the prior quarter.

The Barnett shale topped transaction activity in the unconventional plays, followed by the Bakken shale with three deals totaling $895 million in value during the quarter. The Marcellus shale fell to third in aggregate volume after dominating unconventional deal transactions during the first half of 2010, with six transactions for $631 million recorded for the Marcellus play in the third quarter.

By size, Vedanta Group's $8.9 billion purchase of a 51 percent stake in Cairn India led all deals globally during the third quarter, followed by Lukoil's $5.8 billion re-purchase of ConocoPhillips' 13.05 percent stake in the Russian major. Vedanta is a nonferrous metals and mining company whose holdings are located primarily in India. The acquisition marks Vedanta's first significant foray into oil and gas and will provide controlling interest in India's third largest oil and gas company by revenues.

While Vedanta had the largest acquisition this year, Houston-based Apache has been the busiest with $7.1 billion in acquisitions of BP's Permian assets and stakes in Canada and Egypt. Including its BP asset purchases, Apache has spent $12.1 billion this year with significant corporate acquisitions of Mariner Energy and Devon Energy's shallow Gulf of Mexico properties.

PLS reported that the number of joint venture (JV) transactions slowed markedly in the third quarter, with U.S. transactions totalling $648 million, down from the $4.6 billion that characterized the second quarter of 2010.

"Despite the quarterly drop in domestic joint ventures, buyers and sellers still find the JV business model attractive way to bring value forward for sellers in oil and gas plays that require substantial upfront capital investment while simultaneously providing participation in frontier plays for buyers," said Mason.


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