M&a in Global Oil & Gas Sector

7/27/2019 M&a in Global Oil & Gas Sector

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www.deloitte.com/in

Mergers & Acquisitions

Global Oil & Gas SectorConsolidation & NewAvenues over the landscape


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Contents

Introduction 5

Theregionallandscape:(2008-09and2009-10) 6

Landscapeacrossthevaluechain:(2008-09and2009-10) 8

Somekeytrends 12

Somechallengesgoingforward 13

Contacts 16

Mergers & Acquisitions Global Oil & Gas Sector Consolidation & New Avenues over the landscape | 3


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Introduction

The M&A landscape in 2009-10 has notchanged much in 2008-09 with number of

announced deals increasing from 311 to 339while the number of concluded deals fell byaround 38%

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The global landscape of oil & gas M&A activities has

over the past four years seen many emerging contours

which even before stabilizing have been changing their

shape at accelerated pace. Year 2007 saw the peak of

M&A activities and not surprisingly so given the high

pitch global economic activities around the period. Ever

rising oil prices since mid 2000, easy availability of funds

supporting leveraged buy outs and most importantly,

the bullish business sentiments for the future were some

of the factors underlying the peak on oil & gas M&A

landscape. These M&A activities were primarily growth

oriented which increased the risk prole of companies

supported by higher risk appetite of the investors.

Subsequent downturn in late 2008 and early 2009

along with volatile oil prices had its sobering impact on

the M&A activities wherein the sellers started exploring

divestment options to rationalize the risk of their

portfolio and buyers could afford bargain hunting. This

created a gap in the valuation expectation of the buyer

and the seller leading to lesser proportion of M&A offers

reaching the stage of closure. This was well reected in

the reduced M&A deals concluded over past two years.

Few key features of M&A landscape during pre-Q4 2008

period were:

Increased activities in Oil Field Services (OFS) space

given the rise in contract prices

Enhanced competition between International Oil

Companies (IOCs) and National Oil Companies

(NOCs) for gradually decreasing numbers of new

large prospects

New entrants to the hydrocarbon sector

Increased focus on exploitation of unconventional

hydrocarbon resources such as oil sands and coal

bed methane thanks to the prevailing high oil prices

and bullish outlook for the same.

With global meltdown in last quarter of 2008, the focus

turned on managing risks of the portfolio and getting

access to fast drying credit lines.

Taking a cue from these interesting developments as

we entered 2009, our previous paper on this subject,

published in January 2009, had expected the year

2009 to be a year of mergers of necessity resulting in

relatively consolidated oil & gas landscape.

This paper maps the M&A activities within the oil & gas

space for the period between Q4 2008 and Q3 2010

(study period) and intends to identify key M&A trends in

the sector. The study considers only those deals which

are greater than USD 5 million in value and pertain to

the period during October 2008 to August 2010 as per

data reported by the Merger Market.

The key change in the business environment for the

period of this study as compared to the period of

earlier study has been a relative stability in oil prices,

hovering between USD 60 85 per barrel over past

twelve months, and the global economy lately moving

from stabilization towards recovery to a certain extent.

The analysis and the outcome of this study need to be

viewed in the above context.

The period between Q4 2008 and Q3 2010 has seen

some 650 oil & gas deals being announced, of which,

around 69% are reported to have achieved closure.

The Upstream space continued to lead the M&Aactivity within the sector constituting around 70% of

the deals by number and 58% of the deals by value

concluded during this period. The M&A landscape

in 2009-10 has not changed much in 2008-09 with

number of announced deals increasing from 311

to 339 while the number of concluded deals fell by

around 38%. Interestingly, around 35% of the deals

closed on the date of announcement itself indicating

these to be predetermined bilateral deals while

around 52% of transactions closed within 3 months

of the announcement indicating quick convergence

of expectations in the context of stabilized economic

outlook. While the billion dollar deals continue to

happen with 15 such deals with cumulative value of ~

USD 61.15 billion closing in 2008-09 and 14 such deals

with cumulative value of ~ USD 64.62 billion in 2009-10,

the average deal value followed the past trend with

bulk of the deals in less than USD 50 million and USD

100 500 million ranges. Failures in satisfying specic

conditions for completion of deal as well as lack of

regulatory approvals had been the predominant reason

for unconsummated deals during past two years while

difference in expectations has played relatively minor

role towards the same.



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The regional landscape:(2008-09 and 2009-10)

Despite the slowdown and fairly cautious outlook in

2008-09, North America continued to be a land of

M&A with 134 deals, valued at ~USD 56.30 billion,

accounting for approximately 53% of the total deal by

value.

The concluded deal ow in 2009-10 decreased by

approximately 38% while the corresponding deal values

dropped by around 20% to 173 and ~USD 85.13 billion

respectively. This cautious outlook for the future waswell reected in substantially reduced deal ow even in

the prolic M&A regions of North America, Europe and

Asia. In 2008-09, the deals originated from a total of 41

countries while this number dropped to 32 countries in

2009-10.

The Middle East continued to witness limited deal ow

with only 2 deals concluded in 2008-09 which has an

average value of USD 30 million. The most affected

region has been South America where the M&A deals

almost dried up reducing the number from 19 deals

valued at ~USD 3.73 billion in 2008-09 to 4 deals valued

at ~USD 300 k in 2009-10. The following 2 charts (Chart1 and Chart 2) plot the number of deals and the value

of deals in USD billion.

Chart1:Region-wisenumberofconcludeddeals: Chart2:Region-wisevalueofdealsinUSDbillion

Over the 2 year period, USA and Canadadominated the regional M&A landscape

accounting for 32.50% and 17.92% of the totalvalue of deals respectively

South America

North America

Middle East

Europe

Asia (incl Australia)

Africa

South America

North America

Middle East

Europe

Asia (incl Australia)

Africa

23 4.043

0.31

3.73

111.967

55.67

56.30

42.12510.41

31.72

17.49

17.49

12.60

0.0280

0.03

2.515

0.66

1.86

244

110

65

19

134

74

46

4

110

36

19

2

2

0

8

4

4

Cumulative Mid 2009-10 Mid 2008-09 Cumulative Mid 2009-10 Mid 2008-09

6

Source: Merger Market Database, website: www.mergermarket.com Source: Merger Market Database, website: www.mergermarket.com


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Over the 2 year period, USA and Canada dominated the regional M&A landscape accounting for 32.50% and

17.92% of the total deals by value respectively. The other countries having a signicant play in the M&A space are

Russia, Japan and China followed by deals with multi-country origination. The following table indicates the type of

transactions that have occurred in some of these countries.

India features at 11th position on this global M&A

list with a total of 7 deals valued at ~USD 3.3 billion

accounting for 1.52% share of the total value of deals

for the period. Reliance Industries leads the deals table

from India with acquisition of 5% equity stake held by

Chevron in Reliance Petroleum Limited, merger of the

petrochemicals and rening businesses and acquisition

of 45% equity stake in Eagle Ford Shale asset. The other

India based M&A deals include government companies

acquiring 10% stake in OIL India, Essars acquisition of

Kenya Petroleum Renery Co. (KPRL) from Shell, Chevron

and BP and smaller tranches of investments, USD 22.3

million and USD 10 million, by the PE rms Sage NPE

Fund and Concord Enviro Systems respectively.

Canada reported the largest deal in 2008-09 wherein

Suncor acquired Petro-Canada through a plan of

arrangement for ~USD 18.39 billion. The combined

entity has created a globally-competitive integratedenergy company with a balanced portfolio of high

quality assets and high growth prospects backed by

a strong balance sheet. The merger is expected to

achieve CAD 300 million in annual savings in operating

expenditures as well as CAD 1 billion of annual capital

efciencies through elimination of redundancies and

targeting the capital budgets towards high-return, near

term projects.

The above region centric analysis of M&A transactions

is based on the domicile of the target company without

any consideration for the location of assets held by

these companies. Many of these target companies hold

assets across various regions. Any analysis considering

the location of acquired assets would accordingly make

the actual global M&A landscape appear a little more

complex as many of these acquisitions are truly cross-

border and not conned to a single country and region

thanks to the wide geographical spread of assets held

by these target companies.

SNo Country Noof

deals

Valuein

USDbillion

RemarkTypeoftransaction

1 USA 137 61.99 Marked by deals aimed at consolidation and/or to facilitate completion

of investment plans in view of the reduced access to credit lines. These

deals included merger of group companies, acquisition of balance

shares, nancial institutions and holding companies swapping shares to

improve returns and diversify risks.

2 Canada 101 34.19 Most of the transactions have been in the upstream segment with a

signication number of transactions aimed at consolidating unconven-

tional hydrocarbon resources such as shale assets.

3 Russia 23 19.32 A majority of the transactions have been to de-risk through rationaliza-

tion of portfolio and to diversify returns.

4 Japan 8 13.48 The major deal (~USD 12.18 billion) in Japan has been the Nippon Oil

merger with Nippon Mining Holding Inc. This appears to be a consoli-

dation of group entities as part of a restructuring exercise.

5 China 11 12.34 Most of the China originated transactions are outside Asia in Europe

and North America (mainly Canada). A number of transactions have

been made through the sovereign wealth fund in the upstream space.

6 Multi-

Country

26 10.27 These transactions have occurred across a ll sectors with investments

made in diverse geographies through subsidiary companies in order to

consolidate at local level.

Table1:Moreprevalenttypeoftransactionsbycountry(top7):



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Landscape across the value chain:(2008-09 and 2009-10)

The upstream sector continued to be the main driver for

M&A in the Oil & Gas sector which for the period under

review accounted for ~USD 110.17 billion from 316

deals. This is about 70% of the total number of deals

and 58% of the deals in value terms for the period.

Although number of deals has decreased across all

sub-sectors, the midstream and other transactions (i.e.

oil companies de-risking and diversifying their portfolios

into utilities, mining, etc.) have shown a marginal

increase of 2.63% and 9.16% respectively.

In 2009-10, there were a couple of deals at the top-end

of the scale which were group consolidations in the

Midstream Gas business and the Mining space. A

midstream deal valued at USD 11.75 billion saw Williams

Partners LP agreeing to acquire certain gas pipeline

and domestic midstream businesses from the Williams

Companies Inc. while another mining deal consisted of

Nippon Oil Corporation agreeing to merge with Nippon

Mining Holding Inc., both being listed companies.

Chart3:Sub-sectorwisenumberofconcludeddeals:

The upstream sectorcontinues to be themain driver for M&A

in the Oil & Gas sectorwhich for the periodunder reviewaccounted for 70% innymber terms and58% in terms of totaldeal value.

Others

Utilities

Upstream Services

Upstream Gas

Upstream E&P

Upstream Asset

O&G Holding/Finance Co

Midstream Services

Midstream

Integrated Cos

Downstream Services

Downstream

14

9

3

2

177

42

2

0

24

18

2

1

1714

1612

33

5

9367

54

36

Mid 2008-09 Mid

2009-10

8

Source: Merger Market Database, website: www.mergermarket.com


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The two major transactions in the upstream asset space

pertain to the assets in Gulf of Mexico and in Egypt.

While Devon Energy sold its Gulf of Mexico Shelf assets

to Apache Corporation for ~USD 1.05 billion in order

to improve its liquidity and focus on the development

of onshore properties in North America. In the case of

the Abu Qir concession located in Egypt, the Egyptian

General Petroleum Corporation divested it 40% stake

to Edison International Spa for a consideration of ~USD

1.4 billion. Edisons acquisition is aimed at achieving

consolidation of their position in Egypt and increasing

their reserves base.

In the upstream space, there were 14 transactions

ranging between USD 1 and USD 4 billion primarily

based out of North America and Europe. Russia andCanada also had its share of mega deals, one each in

the upstream space in year 2009-10. The Russian deal

of ~USD 6.6 billion was acquisition of NK Russneft OAO,

an E&P company owned by En+ Group Ltd, by Mikhail

Gutseriyev, a private investor. En+ Group sold the asset

to reduce its debt burden. The Canadian deal of ~USD

8.8 billion was acquisition by a Sinopec group company

of Addax Petroleum Corporation, an international

E&P company. This acquisition amidst competition is

apparently in line with the Chinese strategy to expand

their footprint globally.

In Europe, Premier Oil Plc., a listed UK based oil and

exploration company, has agreed to acquire Oilexco

North Sea Limited, a UK based company engaged in oil

and exploration services in the North Sea region. Premier

Oil Plc. is buying this company from Oilexco Inc, a listedCanada based company engaged in oil and exploration

Chart3:Sub-sectorwisevalueofdealsinUSDbillion

Others

Utilities

Upstream Services

Upstream Gas

Upstream E&P

Upstream Asset

O&G Holding/Finance Co

Midstream Services

Midstream

Integrated Cos

Downstream Services

Downstream

36.55

45.71

4.14

21.43

28.99

5.31

3.99

26.45

1.52

1.12

35.11

24.60

7.09

0.72

25.18

3.02

11.56

56.02

35.76

75.49

38.25

51.53

30.02

95.62

Mid 2009-10 Mid 2008-09


Source: Merger Market Database, website: www.mergermarket.com


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7. A number of deals also originated out of nancial

difculties of BP as a result of oil spill from its asset in

the Gulf of Mexico.

The M&A activities in other sub-sectors, like

downstream, integrated companies and utilities have

been pretty much in line with the past trend though the

midstream and O&G holding / nance companies have

seen relatively larger number of deal ow in the last

two years. Midstream space has been dominated by the

following two types of transactions:

1. E&P companies acquiring midstream companies as a

forward integration strategy and

2. Midstream companies acquiring other midstream

companies as horizontal expansion strategy covering

larger and new markets for growth

A snapshot of the M&A activities during past two years

does reect the survival and stability as two key themes

underlying large proportion of deals, the necessity being

the prime mover than the quest for growth which wasthe hall mark of M&A activities in 2007 and early 2008.



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Some key trends

The recent apparent stabilization of oil prices and

nancial markets after the volatility witnessed in

2008-09 has laid the ground for growth oriented M&A

activities though the general sentiment continues to be

cautious with wait and watch being the corner stone

of M&A strategy for the investor community. Some of

the key trends of the past period such as rationalization

of portfolio, bargain hunting, etc. continue to hold

true, while few of them have reversed on account of

better conditions currently prevailing in the market.

The fortune of OFS companies have seen reversal due

to downsizing of E&P activities which has somewhat

subdued the M&A activities involving oileld services

companies and the few deals being completed are

primarily value deals as compared to the growth

oriented deals during pre 2008 period. Another reversal

in trend in the E&P space has been the consolidation

of smaller E&P companies nding prudence in jointly

pursuing their E&P activities. The E&P space also saw a

large number of companies merging to unlock value for

their stakeholders.

We continue to see the limited presence of International

Oil Companies (IOCs) on the M&A landscape as

acquirers and instead, they have been offering some of

their assets for sale as part of their strategy to rationalize

their portfolio, optimize the cost of operations and

to focus on their core areas / businesses. The M&A

activity in unconventional hydro-carbon resources space

continued with increasing interest in oil sands, shale

assets and coal bed methane activities. New entrants

with higher levels of liquidity such as Pension funds

and PE rms continued with their focus on the Oil &

Gas sector and viewed the sector as potential source of

growth as well as stable revenues. NOCs, especially from

China, continue their purchasing spree across the globe,

albeit at a lesser pace.

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Some challenges going forward

The improving outlook for the global economy and

stability in the oil prices is expected to trigger growth

in E&P activities thereby providing the impetus for the

other sub-sectors to grow. In terms of geographies

of interest, much has been reported about India

and China emerging as major players on the future

global M&A landscape; the rationale being the need

to expand their global footprint for achieving energy

security. It may be noted that India and China are likely

to continue and may be accelerate, acquisition of the

assets located overseas as there are limited avenues for

domestic M&A at present. In terms of new sub-sectors

within larger family of oil & gas, the unconventional

hydrocarbon space is likely to attract larger and new

players increasingly in the geographies other than North

America and Europe.

Few key challenges which are likely to shape the future

oil & gas M&A landscape may be mentioned as follows.

Where to invest?

The top ve IOCs have built a war chest of over USD75 billion in the last couple of years also by slowing

down their M&A activities and preferring organic

growth options instead. Also, the capital projects in the

sector have slowed by ~18% in 2009 with companies

reluctant to invest in mature basins, frontier basins

and in the countries perceived to have unstable scal

regimes. With this backdrop, IOCs are facing a reserve

replacement challenge. The upstream space has recently

seen some new discoveries and the unconventional

oil & gas assets is the area to watch for many seasons

to come. In view of the limited options of new prolic

basins available for exploration, we hope to see higher

investment in existing basins going forward as any delay

in implementing long lead projects will lead to further

lowering of reserve replacement ratio. This would also

result in companies offering highly competitive terms

during bidding for any prospective basin offered to

international companies at the expense of protability

outlook.

Development of new discoveries

In the recent past we have seen large discoveries in

onshore Uganda, deep offshore Mozambique, deep

offshore Israel and deep offshore Philippines, deep

offshore Brazil and deep offshore Ghana. Despite these

nds being large and commercially viable, the subdued

sentiments in global nancial markets and volatile

oil prices have slowed the pace of development of

these discoveries. The pace of development of these

asset would be key to medium term demand supply

situation and the current oil prices augurs well for the

development of these new discoveries.

Global focus on Clean Energy

The ever increasing oil prices till July 2008 turned

the global attention towards reviewing their energy

consumption pattern with a view to achieve reductionin use of fossil fuel based energy. Frenetic pace of global

economic expansion and resultant global warming

threats led to initiatives of COP-15 and UNFCC for

development and expansion of renewable energy

and increase its availability through development of

alternative sources of energy such as hydro, solar, wind,

bio, geothermal, etc. The increasing awareness to

consume less fossil fuel, efcient use of energy and use

of energy efcient appliances combined with national

action plans has resulted in reduction in demand for

fossil fuels at present and may present a potentially

larger challenge to growth rates in consumption of

fossil fuel in future. This has led to diversion of nancial

investments from the conventional oil & gas sector to

the renewable sector.

India and China emerging as major players in the globalM&A landscape in future; the rationale being the need toexpand their global footprint for achieving energy security



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Increasing investment in unconventional Oil &

Gas resources

Following closely on the heels of increased business

activity in the Clean Energy space is the large investment

being made towards development of unconventional oil

& gas resources such as Shale Oil & Gas, Oil Sands, Coal

Bed Methane and Underground Coal Gasication. The

development of these unconventional resources have

leaped into the realms of commercial viability thanks

to the high oil prices and investments made to develop

the sector in past few years in the wake of prevailing

high oil prices. Among all these resources, Shale gas

has found its place on the natural gas rmament in

US with its impact on international LNG market. With

higher investment commitments being made by existing

companies and new entrants, Shale gas would be a key

area to watch for its meaningful and long term impact

on international LNG market. A higher contribution

from Shale gas resources could see some shift in natural

gas market with decreasing leverage of the seller in the

otherwise sellers market.

NOCs to drive investment

NOCs have historically been impervious to global trends

and have acquired assets in every market situation. Their

philosophy of long term holdings for energy security is

indicative of a different investment strategy and is likely

to continue driving their future plans for acquisition.

NOCs from China, Korea, India, Malaysia and Thailand

have been actively participating in acquisition of

assets overseas and successfully acquiring some of the

assets being offered by IOCs as part of their portfolio

rationalization.

IOC-NOC Joint Ventures

IOCs and NOCs have traditionally been pursuing their

businesses independent of each other and following

different business practices and strategies in terms

of geographies, assets and markets. With increasing

ascendance of NOCs, their requirement for larger

pool of capital and technical resources combined with

decreasing availability of new attractive basins for IOCs,

the possibility of NOCs and IOCs jointly pursuing busi-

nesses is an increasing possibility. NOCs like ONGC

have already announced their intent to work with

IOCs, though the success of this model will depend on

management of risk perception, cultural alignment and

exploration successes of such joint ventures in future. An

area where this collaboration is likely to work well would

be in the development of commercially viable unconven-

tional oil & gas resources where IOCs may offer some

technical advantage.

Increased play by Financial Investors

The oil & gas sector requires larger commitment of risk

capital to enter into a growth phase and we expect

to see increased play by nancial investors who have

deep pockets and staying potential , such play being

dependent upon the attractiveness of the investment

opportunities from valuation and growth perspec-tive. Participation by nancial investors is likely to be

dependent on stability of the oil prices and companies

offering a balance portfolio for their investment with

acceptable risk return prole.

With relatively consolidated oil & gas landscape

emanating from the mergers of necessity over past

two years, 2010-11 is likely to witness M&A activities

cautiously oriented towards growth with well diversi-

ed portfolio in order to avoid falling into the traps of

overt optimism of 2007-08. Upstream space is likely to

continue leading the M&A activities within the sector

with increasing share of unconventional resources and

de-risking of portfolio through diversication as one of

its central themes.

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