Global Oil and Gas Upstream M&A 2010 Review

HOUSTON, Jan. 26, 2011 /PRNewswire/ -- PLS Inc., with international partner Derrick Petroleum Services and further analysis from Rystad Energy, reports global upstream oil and gas M&A activity for 2010 reached a record $211 billion. That volume was up 42% from 2009 and 85% higher than a troubled 2008 when only $114 billion in deals were reported worldwide.

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According to Richard Mason, Director of Research for Houston-based research and advisory firm PLS: "The global M&A space exhibited robust diversity in 2010 as a record-setting transaction volume signaled a full recovery from the late 2008 oil price collapse. Sellers took advantage of market conditions to achieve corporate goals, raise cash for drilling and enter new plays. Buyers took advantage of the same vibrant market to acquire both conventional and unconventional assets across the globe."

Impact of Asian buyers

The big driver for upstream M&A activity in 2010 was again China's quest to secure equity in oil resources abroad. Chinese and other Asian state oil majors bought 19% of the upstream assets changing hands in 2010 by dollar value, up from just 1% in 2007.

Chinese companies accounted for four of the top five deals in South America, including Repsol's sale of Brazilian assets for $7.1 billion and BP's sale of Argentina assets for $3.5 billion. The Koreans were aggressive in Canada (buying Harvest Energy and Hunt Oil assets) and in the North Sea (buying Dana Petroleum).

The Chinese move into South America marked a notable shift from the PRC's prior focus on Central Asia and Africa and helped make South America the second most active 2010 upstream M&A market. South America had 17% of global transaction value, behind only North America (52%).

In total, the Asian national oil companies spent $40 billion on acquisitions in 2010 or 19% of global transaction value, up from $21.2 billion in 2009 (14% of the total) and $11.6 billion in 2008.

Major sellers

Fueling the M&A market from the "sell" side were large divestment programs by Western oil majors BP and ConocoPhillips. BP had to aggressively liquidate assets to cover costs of its Macondo well blow-out, while ConocoPhillips continued to shed non-core properties to reduce debt and rebalance its portfolio for more growth.

Together BP and ConocoPhillips made up 14.1% of the global market, selling 15 deals for $29.8 billion to 16 different buyers.

BP sold more than $19 billion of assets in the US Permian Basin, Canada and South America for 9.1% of 2010 global deal value. ConocoPhillips sold $10.6 billion, including stakes in Russia's Lukoil and Canada's Syncrude. In early 2011 ConocoPhillips announced further large US asset sales in the Permian, Rockies and Texas Panhandle.

There were more large-scale deals in 2010 than ever before. The number of $100-million-plus transactions peaked at 58 in the fourth quarter for a total of 215 in 2010.

Corporate deals were 45% of transaction value in 2010, on par with historic levels after a spike to 74% in 2009 on ExxonMobil's acquisition of XTO Energy.

Sale of fractional interests

There also emerged a brisk trade in large minority equity stakes among the oil majors. Such deals added up to $33 billion in 2010 for 16% of the global total. These included the sale of 51% in Cairn India by Cairn Energy, Lukoil's stock repurchase from ConocoPhillips, E.ON's sale of 3.5% in Gazprom and Shell's sale of 10% in Australia's Woodside Petroleum.

Cross-border international transactions

There were also a record number of cross-border asset deals in 2010. Among the larger ones: Sinopec bought ConocoPhillips' Canada Syncrude stake; KNOC bought UK-based Dana and Thailand's PTT bought into Statoil's Canadian oilsands play. In US shale plays, India's Reliance joint-ventured with Atlas Energy, Japan's Mitsui joint-ventured with Anadarko Petroleum, Statoil joint-ventured with Talisman and CNOOC Ltd joint-ventured with Chesapeake Energy.

US shale plays boost global M&A

A North American 'land-grab' for unconventional oil and gas plays, spurred by ExxonMobil's $41 billion XTO Energy purchase in December 2009, continued in 2010 with other majors joining the fray. Both Shell and Chevron bought whole companies to gain stakes in the eastern US Marcellus Shale. Shell purchased East Resources for $4.7 billion at mid-year while Chevron acquired Atlas Resources for $4.3 billion in the fourth quarter.

Global unconventional transactions

Outside the US and Canada, E&P transactions in 2010 were mainly for conventional oil and gas assets. By deal value, the share of conventional assets changing hands rose from 51% of the world total in 2009 to 69%. Among global deals over $1 billion in value in 2010, unconventional assets were targeted in 19 transactions vs 37 conventional deals.

On a worldwide basis, the implied value for oil and gas reserves in the ground remained fairly steady in 2010 from year-end 2009. Quarterly averages for all deals worldwide ranged between $12.90 per equivalent barrel of proved and probable reserves to $15.50/boe (2P).

Portfolio recycling

When viewed through the lens of portfolio recycling, i.e., M&A activity as a share of total asset values based on discounted after-tax cash flows, the global average was 3%. According to Anders Wittemann, Manager of Consulting services at Rystad Energy, "North America has always been a very active M&A market and the deals of 2010 amounted to 6% of the total asset value there. South America was almost equally active with 5% of portfolio recycling. At the other end, Africa had only 1% of its portfolio recycling, with a lot of exploration led transactions by independents and many of the Majors in pursuit of the next frontiers in Africa." "Looking ahead, on a global scale, with companies now increasing their investment budgets for 2011, we can expect even more M&A activity as companies will high-grade their portfolios to get the most from their investments."

In the US . . .

The United States continued to provide the most attractive forum for deal-making with 36% of 2010 world M&A value. The Marcellus Shale was its most active regional market with $16.9 billion in transactions, followed by the Permian Basin with $10.6 billion. International investment in the U.S. remained strong, especially unconventional plays in the form of joint ventures with domestic independents.

US independents added to the deal flow by pruning assets and shuffling their portfolios from gas-weighted to more oily properties. Proceeds were mostly plowed back into unconventional plays or used to de-lever balance sheets as soft natural gas prices held down cash flows.

Apache led all buyers of US assets in 2010 with four deals totaling $8.5 billion. These included Apache's $3.93 billion Mariner Energy merger, the $1.05 billion purchase of Devon's shallow Gulf of Mexico assets and a $3.1 billion acquisition of BP Permian Basin holdings. Shell ranked second in US M&A, spending $5.7 billion for Marcellus and Eagle Ford shale plays. Three other companies exceeded $4 billion in US asset buys: Chevron ($4.3 billion), CONSOL Energy ($4.5 billion in two deals), and Occidental Petroleum ($4.6 billion).

Valuations on US proved reserves averaged $15.60/boe, a modest 1% increase over the 2008 peak. US gas reserve values averaged $2.02/Mcf in the ground, up from a 2009 low of $1.60 but well below the peak of $2.57 in 2008.

In Canada . . .

The Canadian market was driven by BP divestments ($3.25 billion). Other big sellers there were ConocoPhillips, Talisman and ExxonMobil. There was an onslaught of foreign investors, particularly in the form of oilsands JVs with buyers including PTTEP, China Investment Corp, BP and Total. There was more Montney development (Talisman/Sasol JV) and a flurry of smaller mergers and asset sales.

As for 2011 . . .

"Looking forward, the US, Canada and the international market remain very robust. Our analysis reveals deals on the market now total more than $93 billion as compared to $46 billion a year ago, and $20 billion when the market bottomed in May 2009," said Yashodeep Deodhar of Derrick Petroleum Services. "With this extraordinary supply of deals available, 2011 gives every indication of continuing 2010's record-setting momentum."

About the report's sponsors:

PLS, Inc. is a leading industry research, transactions and advisory firm based in Houston, Texas. The company publishes various information reports on mergers, acquisitions, divestments, capital markets, exploration, drilling and midstream services. The company also manages a multiple listing service for assets on the market. PLS has offices in Houston, Calgary and New York. See www.plsx.com.

Derrick Petroleum Services is an independent oil and gas research and consulting firm which specializes in emerging plays and international transactions. The firm is based in Bangalore, India. See www.derrickpetroleum.com.

PLS and Derrick are partners in providing US, Canadian and international clients with leading M&A and E&P databases and services.

Rystad Energy is an independent and integrated E&P advisory and business intelligence firm offering global database applications, stand-alone research products and strategic consulting. Rystad Energy is based in Oslo, Norway. See www.rystadenergy.com.

For further information about the PLS M&A data base, or to purchase the full Global M&A report, call PLS at 713-650-1212.

SOURCE PLS, Inc.

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