On opposite sides of the deal structure, XTO, Chesapeake account for US$22.4 billion of total US$59.6 billion upstream deal value; StatoilHydro wields large US$2.1 billion upstream acquisition outside North America.
In the summer of 2008, merger and acquisition activity in the energy sector was moving along at a record pace. That is, until frothy commodity prices fell, equity markets tumbled, and credit tightened. Essentially, the M&A train derailed. In its O&G Deals 2008 Annual Review, PricewaterhouseCoopers analyzed merger and acquisition activity within the global oil and gas market.
North America
In 2008, oil and gas deals were in North America were on track to surpass the US$164.7 billion high reached in 2006. In 2007, transactions amounted to US$129.7 billion and fell 43% to US$73.6 billion in 2008. Deal numbers were down by 8%, but it was the contrast in the number of big transactions that struck total value. Only 15 deals in 2008 were worth US$1 billion or above compared to 31 in 2007. This alone accounted for US$49.4 billion of the total US$56 billion year-on-year fall in total deal value.
Upstream
Upstream activity experienced the smallest fall across sectors, but still saw total value down by 27%. Two companies – Chesapeake Energy Corp. and XTO Energy Inc. – accounted for US$22.4 billion of the total US$59.6 billion upstream deal value.
While both companies made headlines in the M&A space in 2008, the transactions were vastly different in nature. XTO’s train was on the acquisition track with nine purchases in 2008 totaling US$10.6 billion. Six purchases were made in the first half of the year as oil prices remained buoyant.
One of the largest deals of the year came just before the turmoil began. In June, XTO bought privately-held Hunt Petroleum for $4.2 billion.
Keith A. Hutton, current CEO and then president of XTO commented on the deal last year: “Simply put, the majority of these properties equate to a super-charged bolt-on for XTO. With our knowledge of these assets, we already see the potential to realize more than twice the allocated reserves.”
Upon closing of the deal in September, Bob R. Simpson, chairman and then CEO, stated “With our expansive acquisition program now complete, the company’s efforts are focused on accelerating drilling activity and volume growth with strong financial returns secured by our robust hedging program.”
Chesapeake, on the other hand, was strategically righting itself. Like others, Chesapeake found itself highly-leveraged early in the year and took action in the second half in light of tightening debt markets. A series of eight cash-raising deals yielded a total of US$11.8 billion.
In July, Plains Exploration and Production (PXP) formed a joint venture with Chesapeake Energy for Haynesville Shale assets. In November, StatoilHydro teamed up with Chesapeake for assets in the Marcellus Shale. Additionally, BP acquired tight gas assets from Chesapeake totaling US$3.65 billion.
These ‘piecemeal’ asset transactions were more common among the largest oil and gas upstream deals in North America in 2008 when compared to the corporate deals like the aforementioned Hunt sale, which was the second largest North American deal after Royal Dutch Shell’s US$5.8 billion Duvernay purchase.
Other sectors
Deals outside of the upstream sector were down sharply. The total value of downstream deals shrunk by more than half when compared to 2007. The decline was even steeper for the midstream and service sectors – total deal value in both sectors plummeted to around a quarter of 2007 totals.
Not long ago, the services sector had attracted investors as demand for services grew along with the commodities prices. Oilfield services deals had leapt from US$5.9 billion in 2006 to US$22.9 billion in 2007 with four such transactions among the 12 largest 2007 North American deals. Only one service sector deal – Precision Drilling Trust’s US$1.6 billion acquisition of drilling rig assets from Grey Wolf – featured so high in 2008.
South America
Deal value in South America moved along the same track. Deals there were concentrated in countries such as Brazil, Columbia, and Chile.
Upstream
The largest deal was Norwegian company StatoilHydro’s US$2.1 billion purchase of the half-share it did not own in Peregrino, a heavy oil field in Brazil, and 25% of the deep water Kaskida discovery in the Gulf of Mexico, from Anadarko Petroleum.
Other sectors
The other major deal sector was in the downstream sector where there has been a trend for local companies to take over distribution networks from the majors. The second largest deal continued this trend with Brazilian sugar and ethanol producer Cosan SA Indústria e Coméricio buying ExxonMobil’s Brazilian fuel distribution unit, Esso Brasileira de Petroleo, for US$954 million. The deal was the first big investment by a sugar and ethanol producer in retail fuel distribution.
Europe
The deal train stayed on track in Europe - especially when compared to the activity elsewhere. The number of deals actually increased 64% from 77 to 126, and while total deal value was down 15%, the number is small compared to the 38% drop worldwide.
Upstream
Both upstream and midstream value was up thanks, in part, to various deals for North Sea assets. The biggest upstream deal was GDF Suez’s US$1.6 billion purchase of a package of assets situated along the NOGAT pipeline in the Dutch section of the North Sea from Royal Dutch Shell and ExxonMobil’s Dutch joint venture company, Nederlandse Aardolie Maatschappij (NAM).
Other sectors
The largest oil and gas deal in Europe came in the downstream sector with Russian company Lukoil acquiring a US$2.1 billion 49% stake in a joint venture with Italy’s ERG to operate the ISAB refinery complex in Priolo, Sicily.
In one large deal, Germany’s oil and gas producer, BASF acquired Swiss specialty chemical company, Ciba, for US$4.7 billion.
Another large deal in the European oilfield services sector was Norwegian company BW Offshore’s US$989 million sale of a 26.5% stake in its accommodation rig company Prosafe.
Elsewhere in the European oilfield service sector, while deal numbers remained comparable with the previous year’s activity, the size of deals was sharply down. Only four 2008 oilfield service deals topped the US$250 million mark compared with eight such transactions in 2007.
Russia
Deal activity and deal values both dropped in the Russian Federation in 2008. Transactions were down to 33 from 41 the previous year and overall deal value fell by roughly two-thirds across all sectors.
Asia Pacific
In a strong showing, 2008 deal value in the Asia Pacific region shot up by 73%, from US$13.2 billion in 2007 to US$22.7 billion in 2008. Deals to acquire Australian gas assets accounted for much of the activity. Australia’s share of total Asia Pacific oil and gas deal value rose from just 20% in 2007 to 75% in 2008.
The three largest deals – ConocoPhillips/Origin, BG Group/Queensland Gas Co. and Petronas/Santos – together accounted for US$10.8 billion of deal value. In the third deal, Malaysian state-owned energy group Petronas acquired a 40% interest in the proposed Gladstone LNG project from Santos for US$2 billion in cash.
Getting back on track
While mergers and acquisitions significantly slowed in the wake of the financial crisis, folks across the industry are still predicting an increase in activity going forward. The long-term energy supply and demand fundamentals are still compelling. Credit is beginning to loosen and, while still relatively low, positive movements in oil prices are beginning to stick. Companies that maintained a healthy level of liquidity and kept strong balance sheets will be in prime position for great deals when the M&A train gets back on track.
