M&A levels in the oil and gas industry held up throughout 2007 despite the impact of the credit crunch. The latest edition of annual analysis of M&A activity in the sector by PricewaterhouseCoopers, ‘O&G Deals’, shows deal totals edging up slightly, from US$291.1bn to US$292.2bn year on year. There was no clear evidence of a decline in oil and gas deal activity in the second half of the year as the credit crunch broke. Indeed, the number of final quarter deals in 2007 was 7% up on the final quarter of 2006. What is clear, though, is the changing dynamics of M&A activity within the sector. Oilfield service deals continue to boom reflecting growth in demand and utilisation rates for rigs as well as the need for service companies to scale-up globally in a consolidating market. The total value of deals in the oil field services sector jumped 165% from US$25.4bn to US$67.3bn in 2007. The oil services sector is now a key motor of M&A activity in the wider oil and gas industry, accounting for nearly a quarter (23%) of the value of all deals compared to just 4% in 2005. The trend of consolidation in the sector looks set to continue in 2008. The majors continue to be relative M&A absentees with the dominance of the national oil companies (NOCs) constraining the use of M&A as a reserve replacement strategy. There was a lull in activity that in previous years had seen Russian, Chinese and Indian NOCs becoming major competitors for assets outside their home territory. Instead, it was oilfield services and the downstream sectors that fuelled M&A activity. Aggregate deal value in both sectors more than doubled, in downstream from US$28bn in 2006 to US$61.7bn in 2007 and, even more strongly, from US$25.4bn to US$67.3bn in the services sector. Much of the US$33.6bn increase in downstream deal value was accounted for by the largest O&G deal of 2007 - Dutch chemicals group Basell’s leveraged US$20bn buy-out of Lyondell. ‘O&G Deals’ anticipates that highly leveraged deals will become more difficult in the sector as the credit crunch takes effect. However, while the wider financial and economic environment will be less predictable, the report points to a range of factors that will continue to drive deal activity:
- Corporate players will be mindful of the pressure to replace reserves and the structural rationale for consolidation.
- National oil companies will continue to use their strength to look for international investment opportunities.
- Middle Eastern investors will remain active deal makers.
- Supply constraints, geopolitical considerations and climate change concerns will necessitate continual re-evaluation of asset portfolios.
Rick Roberge, US energy transaction services leader, PricewaterhouseCoopers said: “This phase of service sector consolidation and oilfield service companies’ reach for global scale has a long way to run. Ultimately, logic points to a small number of large global oilfield services players that will be akin to the majors in the integrated sector. The sector is complex with many speciality services and consolidation will not necessarily make sense across the board, but the scope for deal-making will be high on the agenda of many companies as well as investors.” The report also includes a focus on international deals and on each of the key regional markets: International
- International deals, involving either international groups of investors or assets that are spread across territories, were up across the board in 2007, with the exception of the upstream. Total value rose 269% from US$20.5bn in 2006 to US$75.8bn in 2007. Deal numbers were up 42% from 50 to 71 and average deal value was up 160% from US$400 million to US$US1.1bn. International deals took four of the top ten deals in 2007, with bids for Lyondell, GlobalSantaFe, Huntsman and IPSCO totalling US$54.4bn. In the 2006 top ten, in contrast, there was just one international deal, worth US$5.3bn. Europe
- Total O&G deal value in Europe could not rival that of 2006 when the overall total was boosted by the StatoilHydro US$32.2bn upstream merger. Setting this single deal aside, remaining upstream deal value was slightly up and the value of downstream deals more than doubled, from US$3.7bn in 2006 to US$8.4bn in 2007, to account for the biggest share of total European O&G deal value. Michael Hurley, UK oil and gas advisory leader, PricewaterhouseCoopers LLP, said: “M&A activity will continue to be fuelled by the search for globalisation, scale and profitability. European oil field service activity is likely to consolidate and internationalise away from mature markets. Junior oil companies will continue to be the targets for majors who are opportunity constrained while integrated oil companies will continue to look at downstream divestments. All this adds up to continued strong activity over the next year across the board.” North America
- O&G deal volume in North America was down 21%, from US$164.7bn in 2006 to US$129.7bn in 2007. Much of the difference was accounted for by the presence of the US$32.4bn Kinder Morgan buyout in the 2006 total. Setting this aside, deal numbers and value were broadly level year-on-year. There were 31 deals in 2007 worth US$1bn or above, for example, compared to 32 in 2006. Moves by foreign buyers for North American assets were a common theme in 2007 including noteworthy moves by a number of European buyers. Russia and the Commonwealth of Independent States
– oil and gas M&A activity was driven by the continuing restructuring of the Russian energy industry. Total deal value was up 19%, from US$30.1bn in 2006 to US$35.7bn in 2007, in the Russian Federation and neighbouring CIS states. The number of deals was relatively unchanged, 41 deals in 2007 compared to 42 the previous year. This pushed average individual deal value up 21% and the US$870 million deal size was three to four times the average US$236 million recorded in other geographic regions. Not surprisingly, the vast majority, 83%, of the region’s O&G deal value was in the upstream sector. This was more than double the 40% upstream share worldwide outside the region. Asia Pacific
- Total 2007 deal value in the Asia Pacific region maintained its 2006 level with a total US$16.2bn of deal activity. The total continues to fall short of the US$19.6bn transacted in 2005. Deal numbers fell 28% from 105 to 76 but this pushed average size up 38% to US$213 million. Australia provided the focus for the largest number of deals within the region but South Korea was the location for the biggest share of total transaction value with a string of deals for downstream refining, petrochemical and retailing assets. The period ahead will see a major burst of deal activity in Australia, as the state government of South Australia removes an ownership cap on Santos, Australia’s third-largest oil and gas group. With substantial reserves and a strong international presence, the company sees this as a growth opportunity, allowing them to offer scrip for acquisitions. It has also been speculated that the move will lead to a multibillion dollar auction.
Notes to Editors:
1. A copy of ‘O&G Deals’ can be downloaded at: www.pwc.com/ogdeals 2. The Transaction Services group of PricewaterhouseCoopers (www.pwc.com/ustransactionservices) offers a deal process that helps clients bid smarter, close faster, and realize profits sooner on mergers, acquisitions, sales and financing transactions. Dedicated deal teams operate from 16 U.S. cities and some 90 locations in North America, Latin America, Europe and Asia. 3. Methodology: O&G Deals includes analysis of all global cross-border and domestic electricity and gas utility deal activity. It is based on published transactions from John S. Herold, Inc. ‘M&A database', December 2007. Analysis encompasses announced deals, including those pending financial and legal closure and those which are completed. Deal values are the consideration value announced or reported including any assumption of debt and liabilities. Figures relate to actual stake purchased and are not multiplied up to 100%. The geographical split of the deals refers to the location of the asset. The sector and subsectors analysed include: Downstream: gasoline service stations, petrochemical, propane distribution, refining, retailing/marketing - misc., terminals/storages; Midstream: gas gathering/processing, pipelines - gas, pipeline - liquids, tankers/other transportation; Oilfield Equipment Services: diversified, drillers/drilling rigs, geophysical/reservoir services, manufacturers, miscellaneous, offshore services/vessels, production/well services, tool rental/drilling services; Upstream: acreage, reserves.
For more information contact:
Consumer and Industrial Products & Services PR Senior Manager
Tel:020 7212 5133
Mobile:07834 318 350