IHS Markit: Reduced exploration restricting deepwater M&A activity

Oct. 30, 2017
Reduced spending for oil and gas exploration is limiting availability of quality deepwater assets for merger and acquisition deals, according to an IHS Markit report.

Reduced spending for oil and gas exploration is limiting availability of quality deepwater assets for merger and acquisition deals, according to an IHS Markit report.

Offshore has represented just 16%, or $300 billion, of global upstream M&A transaction value from 2006 to year-to-date 2017 despite offshore discoveries accounting for 69% of oil and gas volumes discovered during that period, the information services firm said.

Offshore deal value during the period was split evenly between deepwater and shallow-water activity, though there were three times as many shallow-water deals. However, shallow-water deal activity has been in steady decline during the past 5 years.

The average size of deepwater deals since the beginning of 2006 has been $775 million compared with $325 million for each shallow-water deal. Although deepwater has accounted for fewer deals in the total global deal count, deepwater deal flow has represented a more consistent percentage of annual global upstream deal count.

"Deepwater M&A has typically involved undeveloped assets driven by significant deepwater oil and gas discoveries, with deal activity centered on owners selling down asset stakes to lock in returns and to share or derisk development costs," explained Cindy Giglio, senior principal energy M&A analyst at IHS Markit and author of "IHS Markit M&A Topical Insight-Potential for change in offshore dynamics."

Giglio said, "Shallow-water M&A has typically involved producing assets, and often buyers of shallow-water assets are seeking to derisk their upstream asset portfolios and generate lower-risk cash flow."

Independents, NOCs remain active

During the last decade, independent public exploration and production companies have been the most active buyers and sellers of offshore assets. Most of their offshore activity has been in the shallow water, and, overall, they have been net-sellers.

National oil companies, whether wholly government-owned or partially government-owned have been net-buyers of offshore assets, especially deepwater, IHS Markit said.

"The major integrated companies have been less active in the offshore M&A market in terms of transaction value than NOCs-partial NOCs," Giglio said. "On a net basis, these IOCs have been divesting both deepwater and shallow-water assets.

"Smaller integrated companies have been divesting deepwater assets and buying shallow-water assets. Shallow-water M&A faces a dwindling number of pure-play companies as well as competition from onshore unconventionals. The shallow-water regions have seen a decline in deals during the past 5 years, but interest from new buyer types is triggering a rebound in activity in certain regions," she said.

North Sea reemergence

In recent years, Europe, primarily the North Sea, has had a reemergence of offshore upstream M&A activity. Most of the European M&A activity has been in shallow water, but in recent weeks, several deepwater assets in Europe have been listed for sale. IHS Markit estimates current deepwater opportunities in Europe at $3.6 billion, or 20% of the global deepwater assets on the market.

"Offshore M&A activity in the US has virtually stalled," Giglio noted. "In the Gulf of Mexico, this reflects the stronger interest in onshore unconventionals, more stringent regulations in the post-Macondo era, and low oil and gas prices that have reduced the number of potential M&A participants."

In Alaska, weak commodity prices and fiscal-tax uncertainty have slowed development of new projects and thus upstream M&A. Nevertheless, the deepwater US gulf accounts for $3.2 billion, or 17% of the global deepwater assets on the market.

The potential for offshore Brazil M&A activity depends on the financial condition of both the Brazilian government and Petroleo Brasileiro SA (Petrobras), IHS Markit said. In recent weeks, Petrobras has put roughly $2 billion of Brazilian shallow-water assets up for sale, bringing the total Brazilian shallow-water opportunities on the market to $5.4 billion, or 40% of the global shallow-water assets on the market.

IHS Markit added that big recent discoveries offshore Africa and the Middle East make the region most likely to attract offshore M&A activity in the next few years. Africa accounts for 26%, or $4.7 billion, of global deepwater assets on the market.