John S. Herold reports robust upstream M&A activity

Aug. 15, 2005
Upstream merger and acquisition (M&A) activity worldwide rebounded last year, particularly in the US and Canada, in a trend that is continuing, said a report from John S.

Upstream merger and acquisition (M&A) activity worldwide rebounded last year, particularly in the US and Canada, in a trend that is continuing, said a report from John S. Herold Inc. and Harrison Lovegrove & Co. Ltd.

Global transaction value for both corporate and asset deals in 2004 totaled more than $68 billion. That was an increase in value of more than 50% from 2003, said the report entitled 2005 Global Upstream M&A Review.

Proved reserves sold in 2004 totaled 19.7 billion boe. Oil accounted for more than 70% of the reserves sold worldwide, boosted by the auction of Yuganskneftegas, a subsidiary of struggling OAO Yukos, and by an increase in Canadian oil sands deals.

Arthur Smith, John S. Herold chairman and chief executive officer, told a July 25 news conference in Houston that last year’s M&A activity was the first notable increase since 1998.

Robust M&A activity continues this year, most notably with Chevron Corp. and CNOOC Ltd. in a bidding contest to acquire Unocal Corp. (OGJ Online, July 20, 2005).

Christopher Sheehan, John S. Herold director of M&A research, said asset sales of more than $25 billion already were booked in the US and Canada this year.

“I think it will continue to be a really hot sellers’ market,” Sheehan said. “Underpinning that are the high commodity prices. Buyers can look at the strip pricing and make pretty aggressive assumptions.” He said buyers use hedging to lock in returns.

“You need to replace your reserves in this business. The market offers that quick fix,” Sheehan said.

Smith agreed the M&A market is very active in the US and Canada because producers appear to believe in the sustainability of high commodity prices.

US, Canada outlook

Spurred by consolidation in the US gas industry and a rebound in Canadian activity, transactions in those two countries spiked to 56% of worldwide activity during 2004 vs. their 5-year average worldwide share of 43%, the report said.

The combined US and Canadian deal count reached its highest level in 5 years, although it remained below a 10-year peak because some companies hesitate to sell properties that provide strong cash flow and contribute to achieving production targets.

Royalty trusts drove activity in Canada, where transactions more than doubled to more than $10 billion, 15.7% of total worldwide value.

Transactions elsewhere

Michael Bridden, managing director of research for Harrison Lovegrove & Co.’s London office, said deal count was flat outside of Canada and the US.

The European deal count was the highest in 5 years. Europe accounted for 13% of total worldwide transaction value. North Sea transactions accounted for nearly 70% of Europe’s total.

OMV AG’s purchase of a 51% stake in state-owned Romanian oil company Petrom SA was Europe’s largest transaction, at $2.9 billion, the report said. OMV acquired its Petrom stake through a cash-stock deal (OGJ Online, July 23, 2004).

The Russian government’s seizure and sale ofYuganskneftegas to Baikal Finance Group represented nearly 60% of the Asia-Pacific region’s $16 billion transaction value, the report said. Yuganskneftegas was sold at a Dec. 19, 2004, auction in Moscow. OAO Rosneft later agreed to buy Baikal (OGJ Online, Mar. 15, 2005).

Central America and South America recorded just 0.4% of the worldwide total. Activity in those regions was depressed by political and economic instability, the report said.

Africa and the Middle East region accounted for 4.9% of the worldwide total transaction value. But the region shows signs of increasing deal activity, most notably in Algeria and Mauritania, the report said.