Upstream oil & gas companies winners in a choppy M&A market
Deal numbers down but values up in 2009 with a positive outlook for the sector in 2010
London 18 January 2010: The last twelve months has been a challenge for many companies in the oil and gas sector, but there have been substantial opportunities for those with strong balance sheets. And the outlook for 2010 is looking positive, according to Ernst & Young’s third annual Global oil and gas transactions review.
A total of 837 oil and gas deals globally were announced in 2009 compared to 1,152 in 2008, with upstream deals accounting for 72% of these. Significantly, the total value of oil and gas transactions was US$198bn, a 10% increase compared to 2008, perhaps surprising given the lower average commodity prices in 2009.
M&A activity in the second half of 2009 was much stronger than the first half with 485 deals compared to 352, an increase of 38%. The total value in the second half of 2009 was US$109bn compared to US$89bn in the first half of the year, up 22%, reflecting the improving capital market conditions and growing consensus on oil price outlook.
Andy Brogan, Global oil and gas transaction advisory leader at Ernst & Young says: “The positive trends that we have seen in recent months are likely to continue into 2010 and the outlook for oil and gas transactions is healthy in upstream and oilfield services. In the downstream sub-sector, over-capacity in some regions is likely to drive a longer period of uncertainty and transactional challenges. But as 2009 has demonstrated, one person’s challenge represents another’s opportunity.”
Oilfield Services (OFS) – deal activity plunges
Transaction activity plunged in oilfield services in 2009 by over 60% with 79 deals completed compared to 202 in 2008. Based on transactions where the deal value was revealed, the value of deals in 2009 was US$11.4bn compared to US$30.1bn in 2008, down 62%.
Jon Clark, oil and gas director at Ernst & Young comments: “The evaporation of funding and the impact of lower oil prices down on average from US$96.87 in 2008 to US$61.54 in 2009 and cutbacks from operators were the chief causes for the slump in transaction levels. However there were buyers who entered this phase in the cycle with strong balance sheets who took advantage of others’ distress to complete opportunistic bolt on deals.”
Downstream/Midstream – continuing decrease in deal activity in 2009
The downstream sector experienced further decline in transaction volumes during 2009, continuing the downward trend that started in the previous year. There were 153 transactions in 2009, some 30% lower than 2008. The disclosed value of downstream transactions was US$38bn in 2009 compared to US$40bn in 20008, down 4%.
Upstream – major deals highlight have and have not’s in 2009
2009 witnessed a strong recovery in major deal activity in the upstream sector as with deal volume decreased to 605 compared to 730 in 2008, while deal value increased by 33% from US$112bn to US$149bn in 2009.
Clark says: “The oil price has strengthened, equity capital is starting to flow back into the sector, development projects are coming back on stream with increasing frequency, and stronger exploration budgets are being set for 2010.
However, the year has been uncomfortable for many across the sector and the mixed fortunes of the upstream universe continues to leave a wide divide between the have and have not’s. The increased oil price may have generated a scurry of equity investment, but funding constraints continue to impact many, be it equity or debt, and the success of proposed IPOs in 2010 will be carefully monitored.”
Outlook for 2010
With stability comes market confidence and equity investment is returning to the oil and gas sector. A number of IPOs are planned for 2010 and, if successful, there will be increased investor interest in the sector again.
Brogan concludes: “Lessons have been learned regarding the risks of investing in single asset pure exploration companies and we anticipate that companies successfully coming to market will have larger portfolios, probably spread from exploration into production operations.
Commodity pricing volatility is likely in the short term as global demand is predicted to remain below supply capacity in 2010. As economic recovery drives demand growth, greater pricing stability is expected in the medium term, although the precise timing and shape of recovery remains a subject of much speculation.”
