Mergers and acquisitions in the US oil and gas sector hit the highest level in 1¾ years during the second quarter, said officials at PricewaterhouseCoopers LLP (PWC) in a recent report.
With improved credit markets, buyer-seller expectations finally aligning, and stabilized commodity prices, the company said, 142 deals were announced in the second quarter of 2010, the largest number since the third quarter of 2008 when there were 190 deals. Total value of deals announced in the latest quarter was $36.9 billion, up from $13.7 billion in the second quarter of 2009.
There were 262 announced deals in the first 6 months of 2010, a 27% increase over the same period last year. "A sequential quarter-over-quarter comparison shows oil and gas deal activity continues to be robust with an 18.3% increase over the first quarter, which included 120 announced transactions at a value of $32.5 billion," PWC reported. "Upstream asset-focused deals dominated deal activity, comprising 67% of total deal value in the quarter, along with the largest total deal volume at 80%," officials said (Fig. 2).
Michael Collier, US leader of the energy M&A practice at PWC, expects the momentum to continue through the second half of this year. "As commodity prices and equity markets continue to stabilize, senior managers are showing greater inclination to do transactions today than we've seen over the past 2 years. At the same time, buyers and sellers are more aligned when it comes to valuations, which is helping to drive the market and to ultimately get deals done," he said.
Asset sales dominate
In the second quarter, asset sales represented 85% of deal activity compared with 15% from US corporations, partly because of oil and gas companies exiting conventional commitments to focus on and finance positions in unconventional sources of energy.
"Asset sales heavily contributed to the resurgence in activity in the second quarter, which have largely been driven by oil and gas companies' continuing to adjust their portfolios to maximize the return on their core businesses," said Collier. "While the [Macondo] oil spill has created some uncertainties for deepwater assets, the US government policy response will be the real driver as CEOs of both resource and equipment and services companies rethink the risks and rewards of doing business in the deep water."
There were $13.4 billion of deals related to asset sales involving non-US entities taking positions in shale gas and unconventional oil and gas assets totaled $13.4 billion, PWC reported. Foreign buyers accounted for more than 25% of the transactions in the quarter, up from 21.6% in the same period last year. "Inbound transactions by China-based companies accounted for $900 million in M&A deals, demonstrating China's ongoing search to feed its appetite for oil and gas as the world's leading consumer of energy," the company said.
There were 11 refinery deals with $3.7 billion total value, compared with five deals with a total value of $231.6 million in the same period last year. "Some spectacular returns were achieved during the last cycle for investors with the courage to buy at the bottom of the cycle. While the deal volume in refineries is relatively small, there may be more 'bets' on improving crack spreads as investors, some of whom will be private equity-backed, will try to redo some of the last cycles' great wins," Collier said.
"With a significant amount of capital on the sidelines, private equity firms are beginning to find opportunities to do deals in oil and gas, especially focused on midstream and upstream assets," he said. "As deal activity continues to heat up, US corporates are acknowledging the savvy deal-making strategy of private equity firms and are adopting those skill sets to better compete and succeed in the competitive…industry."
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