E&Y: Oil, gas M&A volume up, value down during 2011

The oil and gas industry continues to be one of the most active global sectors for mergers and acquisitions in a trend that could continue during 2012 despite an uncertain economy, Ernst & Young executives said while releasing the E&Y annual review of M&A activity on Jan. 24.

More than 1,322 oil and gas transactions were announced during 2011, up 5% from the number of transactions announced the previous year.

The aggregate value of 2011 oil and gas transactions was $317 billion, 7% below the 2010 level. E&Y reported 71 transactions valued at $1 billion or more during 2011 compared with 76 such deals during 2010.

Upstream transactions represented 72% of total deal volumes. The US and Canada accounted for 562 of those transactions, or 59% of the global total. The largest transaction of 2011 was Kinder Morgan Inc.’s $38 billion acquisition of El Paso Corp.

Unconventional, downstream M&A

Shale-related transactions totaled $66 billion worldwide, said Andy Brogan, E&Y global oil and gas transactions leader.

Most unconventional M&A so far has been in the US and Canada, but Brogan noted China holds the largest estimated shale gas resources worldwide with 19%.

“If the potential in this asset base can be unlocked, this could transform the oil and gas landscape in years to come,” he said.

Downstream transactions declined modestly during 2011 compared with 2010. Brogan said 2011 proved difficult for downstream M&A activity.

“The big driver of downstream M&A activity is the move by international oil companies to rebalance their portfolios as part of a continued drive towards increased capital efficiency,” he said.

European refiners are struggling, and 75% of them reported negative cash flow during the third quarter 2011. Brogan said this stems in part from Europe’s aging refining fleet, which was built for a gasoline-orientated market.

Regarding a trend away from integration, Brogan expects companies will continue to rationalize and work toward “doing less but better” given declining refined product demand in Europe and North America.

Integrated companies are showing very stable margins compared with pure play upstream or downstream companies, he said.

“As we move to a world in which capital is hard to come by, we could see the return of integration,” he says.

E&Y reported 103 global downstream transactions in 2011, down 16% from 2010. The value of the 2011 transactions was $38 billion compared with $40 billion in 2010.

The top 10 transactions accounted for 71% of the total declared value. The largest included Berkshire Hathaway’s acquisition of Lubrizol Corp. for $8.9 billion and Ashland Inc.’s acquisition of International Specialty Products Inc. for $3.2 billion.

Nearly half the transactions took place in North America while Europe and Asia accounted for 24%.

“Downstream (M&A) activity will continue but may be more concentrated in storage and midstream rather than refining,” Brogan said.

Oil services companies reported relatively strong M&A activity during 2011 when the value of announced deals was $37 billion, 15% higher than in 2010.

The number of oil services-related transactions was up by almost 64% with 177 announced deals during 2011.

“There is a positive outlook for 2012 underpinned by those seeking new geographies, new customers, or new technologies,” Brogan said.

Contact Paula Dittrick at paulad@ogjonline.com.

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