Company sales dominate 2006 global upstream mergers, acquisitions

March 26, 2007
Worldwide transaction values for upstream corporate and asset deals totaled more than $166 billion last year compared with more than $160 billion during 2005, consultants said in an annual report.

Worldwide transaction values for upstream corporate and asset deals totaled more than $166 billion last year compared with more than $160 billion during 2005, consultants said in an annual report.

John S. Herold Inc. and Harrison Lovegrove & Co. Ltd. on Mar. 15 released highlights of their joint 2007 Global Upstream Mergers and Acquisitions Review.

Total expenditures on corporate transactions last year topped $100 billion, down from more than $120 billion in 2005. Total expenditures for asset deals increased for the fifth consecutive year, soaring 55% to more than $60 billion. The review analyzed more than 280 upstream transactions.

Arthur Smith, John S. Herold chairman and chief executive officer, and Martin Lovegrove, Harrison Lovegrove chief executive, noted this year “could be a frustrating year from the industry” because rising service costs are apt to constrain earnings and cash flow. Meanwhile, oil and gas futures prices appear are to be trending lower than last year.

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“Early signs are that assets continue to come to the market in abundance,” the executives said. “But should commodity prices stay around existing levels, it is almost certain that deal prices will fall against those seen last year. Some sales will also likely be withdrawn as buyers fail to offer prices that match the expectations of sellers. Indeed, we have already started to see this feature developing.”

Falling commodity prices hampered deal activity starting during the second half of 2006, the review said.

Reserves values up

Worldwide proved reserves pricing was up 34% to $12.86/boe during 2006. In the US and Canada, proved reserves pricing was up nearly 20% to $17.89/boe. Worldwide pricing for proved plus probable reserves also hit records, jumping threefold to $5.51/boe.

Although values were higher, the volume of proved reserves bought and sold fell for the second consecutive year. Natural gas accounted for 53% of the total proved reserves involved in 2006 transactions, a 10-year high, the review said.

The two largest corporate transactions in 2006 and four of the top five asset deals were predominantly weighted towards gas, the review said.

The biggest corporate transaction was the $30 billion merger of Norway’s Statoil ASA and Norsk Hydro ASA’s oil and gas operations, creating the world’s largest offshore operator (OGJ, Jan. 1, 2007, p. 29). The largest asset deal was OAO Gazprom’s takeover of a majority stake in Sakhalin Energy Investment Co. Ltd. (OGJ, Jan. 1, 2007, p. 29).

Buyers

Africa experienced a breakout year, having four transactions worth more than $1 billion each. That compared with only two such deals during the previous 4 years. Transactions in the US and Canada accounted for more than 55% of total 2006 global transaction value.

Christopher Sheehan, John S. Herold director of M&A research, told OGJ that he expects West Africa, Canadian oil sands, and US unconventional gas plays to be hot spots during 2007. The deepwater Gulf of Mexico also is of keen interest, Sheehan said. Of the 10 largest US transactions last year, five of them were in the Gulf of Mexico with three of those involving deep water.

National oil companies (NOCs) accounted for a record one third of global upstream M&A spending in 2006. Sheehan expects NOCs will remain active buyers in 2007.