Global Oil and Gas Transactions Review 2009

8/9/2019 Global Oil and Gas Transactions Review 2009

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Global oil and gas

transactions review 2009


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1 Global oil and gas transactions review 2009

We concluded our publication last year by predicting that

the global economic downturn may lead to a slowdown in oil

and gas activity in the next 12 months, but the longer-term

fundamentals remain favorable. 2009 has indeed been a year of

considerable challenge for many, but opportunity for some, and

the fundamental outlook for the sector continues to look positive.

Its clearer a year later that there is light at the end of the tunnel,

rather than a train coming toward us.

In total, 837 deals were announced in 2009, with upstream

accounting for 72% of these. The volume of deals was down 24%

compared to the previous year. The total value of oil and gas

transactions announced globally stood at US$198b, up some

10% compared to the previous year. This is perhaps surprising

given lower than average commodity prices in 2009, although

the statistics have been dominated by a few large transactions.

If Exxon had not announced its US$41b acquisition of XTO in

December, the figures would have looked very different.

M&A activity was much stronger in the second of half of 2009

(485 deals versus 352 in the first half), reflecting the improving

capital market conditions and growing consensus on oil

price outlook.

Corporate oil and gas valuations started 2009 at subdued

levels, reflecting depressed commodity prices and wider capital

markets malaise. This presented opportunities for well-capitalized

acquirers, such as Asian reserve-seeking National Oil Companies

(NOCs), but naturally drove sellers toward asset-level transactions.

Overall, would-be acquirers had the upper hand and the total

value of announced corporate transaction levels were upconsiderably in 2009, accounting for 66% of total deal value

compared to 44% in 2008.

The positive trends that we have seen in recent months are likely

to continue into 2010, and the outlook for oil and gas transactions

is healthy in upstream and oilfield services. In the downstream

world, over-capacity in some regions is likely to drive a longer

period of uncertainty and transactional challenges. But as this

year has aptly demonstrated, one persons challenge represents

anothers opportunity.

Introduction

Welcome to Ernst & Youngs review of global oil

and gas transactions in 2009. In this report we

look at some of the main trends in oil and gas

merger and acquisition activity in the last 12

months and consider the outlook for deal activity

across the sector in 2010.


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2Global oil and gas transactions review 2009

Andy Brogan

Global Oil & Gas

Transaction Advisory

Leader

+44 (0) 20 7951 7009

[email protected]

Jon Clark

Director

Oil & Gas M&A

+44 (0) 20 7951 7352

[email protected]


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2009 has witnessed the much speculated green shoots of

recovery in the upstream sector. The oil price has strengthened,

equity capital is starting to flow back into the sector, development

projects are coming back on stream with increasing frequency,

and stronger exploration budgets are being set for 2010.

However, the year has been uncomfortable for many across the

sector. The mixed fortunes of the upstream universe continuesto leave a wide divide between the haves and have-nots. The

increased oil price may have generated a flurry of equity

investment, but funding constraints continue to affect many, be

it equity or debt, and the success of proposed IPOs in 2010 will

be carefully monitored. Companies increased cost of capital

has not necessarily been factored into transaction valuation

methodologies as much as might be expected.

Commodity pricing, another key valuation parameter, has not

been universally positive either. Oil has spent the second half

of the year hovering around the anticipated US$70 per barrel

mark, a welcome improvement for many from the mid-30s seen

at the start of the year, but there is an ongoing short-term pricingconcern given depressed levels of global demand and surplus

OPEC capacity. Natural gas pricing has had a tougher year,

and possible development projects continue to face delays as

companies wait for improved pricing and stability.

In a year of ups and downs for the industry, M&A activity began

to pick up pace, increasing by volume quarter by quarter over

the first three quarters of the year. Improved access to funding

and relative economic stability have encouraged those that can

to take advantage of reduced valuations and less competition

for opportunities. This has largely been to the benefit of well-

capitalized organizations with a long-term commodity outlook or

need, such as Asian NOCs with growing energy-hungry economies

and gas utilities seeking a physical hedge. Deal activity within the

independent sector has been lower.

Corporate deal volumes on the up through aperiod of more depressed share prices

Despite the increased M&A activity in the second half of the

year, transaction volumes fell short of 2008 levels, with 605

upstream transactions announced in 2009 versus 730 in 2008.

Significantly, asset deals showed a 22% drop in volume from 2008

levels while the number of announced corporate transactions,

was consistent with 2008 levels, accounting for 21% of deals by

transaction volume and over 70% by deal volume as acquirers

looked to take advantage of depressed market pricing.

The combined value of announced deals in 2009 was US$149b

according to data from IHS Herold Inc. comparing favorably to the

US$112b in 2008. However, two transactions made up US$62b

of the value being Exxon Mobils announced deal with XTO andSuncors acquisition of Petro-Canada.

North America continues to be the mostactive market

A little over 50% of global upstream deals announced in 2009 were

in North America, down from the 80% bias that we reported last

year. While Canadian volumes were consistent, 2009 witnessed a

42% drop in US deal volume. This is a clear demonstration of the

market impact of difficult funding conditions and a challenging

short-term natural gas outlook in North America.

Upstream

2008 2009

Asset Corporate

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2008 2009

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In terms of deal value, North America accounted for over 65% of

announced transaction values according to IHS Herold Inc, with 5of the 10 largest transactions targeting North American reserves.

Exxon Mobils announced US$41b acquisition of XTO in December

and Suncors US$21b acquisition of Petro-Canada in March were

the years largest announced transactions, and are reflective of

a longer-term outlook being taken on unconventional resources,

such as oil sands and shale gas, from the larger independents and

International Oil Companies (IOCs). More generally, however, the

relative weakness of natural gas prices in the US shifted acquisition

activity back to conventional reserves; oil represented about

50% of acquired US proved reserves for the year until Exxons

announcement swung the bias back to natural gas.

US private equity activity in the upstream sector showed strongsigns of improvement during the second half of the year. Sizeable

private equity investments included: Global Infrastructure

Partners investment of US$588m in Chesapeake Midstream

Partners; First Reserve Corporations US$500m investment in

Southeast Asia-focused KrisEnergy; Apollo Global Managements

US$500m acquisition of Parallel Petroleum; and KKRs US$350m

investment in East Resources. We anticipate a renewed interest in

the sector from private equity through 2010. There is, however,

a backlog of businesses to exit that may affect the quantity and

timing of new investments.

Asian NOCs funding rapid expansionNational oil companies were the focus for much of the M&A

speculation in 2009, targeting reserves and production to

support continued domestic economic growth. Being

Government-sponsored, such entities typically rely less on

external financing, which is a key advantage in a funding-constrained market. Sinopecs US$9b acquisition of Swiss oil

explorer Addax, announced midway through the year, and KNOCs

US$4b acquisition of Harvest Energy Trust in October are among

the top five transactions by value this year. Both transactions are

representative of Asian NOCs, recent international expansion and

deep pockets Chinese NOCs, for example, have spent almost as

much this year on upstream investments as they have over the

last five years combined. Their focus isnt just on conventional

reserves PetroChinas US$1.7b purchase of a majority stake

in undeveloped steam assisted gravity drainage (SAGD) projects

represents the largest Chinese NOC acquisition in the Canadian oil

sands to date.

IOC-NOC joint ventures are indicative offuture trends

We anticipated at the start of the year an increasing likelihood of

additional strategic partnerships between NOCs and IOCs. These

arrangements offer reserve-hungry NOCs access to reserves

and experienced international partners, while the IOCs benefit

from access to capital and potentially service or infrastructure

capabilities. Many of the recent license awards in Iraq exemplify

this theme.

Looking forward, things may be less positive for IOCs in these

arrangements as we predict that reserve-seeking NOCs in

certain areas may partner directly with other reserve-holding

NOCs, leveraging political ties to access opportunities and

expand operations.

Afric

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Australia

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Central/S

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Number of transactions 2008 Number of transactions 2009


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CNPC and KMGs US$3.3b acquisition of MangistauMunaiGas

(MMG) from Central Asia Petroleum and China National Offshore

Oil Corporation (CNOOC) and Qatar Petroleums E&P sharing

agreement are examples of the adoption of more international

NOC partnering. With Sinopecs acquisition of Addax resulting in

its exclusion from the second Iraq licensing round, NOCs may look

to be more selective in their targeting.

Outlook for 2010

With stability comes market confidence, and we have seen equity

investment returning to the sector. A number of IPOs are planned

for 2010, and if successful, we can expect to see increasing

investor interest in the sector. Lessons have been learned

regarding the risks of investing in single-asset, pure exploration

companies, so we anticipate that companies successfully coming

to market will have larger portfolios, probably spread from

exploration into production operations.

Further commodity pricing volatility is likely in the short term

as global demand is predicted to remain below supply capacity

into 2010. As economic recovery drives demand growth, greater

pricing stability is expected in the medium term, although the

precise timing and shape of recovery remains a subject of much-

speculation. This strong medium-term consensus will be a key

enabler in upstream transactions in 2010 as buyers and sellers

share the outlook for a critical component of pricing.

NOCs have arguably been more active than the majors in 2009,

but Exxon Mobils announced acquisition of XTO may be the trigger

for a wave of acquisitions as the majors emerge from a year of

restructuring and internal reorganization with balance sheets that

are stronger than many, certainly looking across other industries.

Service costs have fallen in 2009, and 2010 may see a

return to investment in longer-term capital projects, often in

unconventional resources, such as shale gas, oil sands, and

coal bed methane. The heavy investment requirements of these

projects has left a number of IOCs without financing options

to meet required development costs, and these continue to be

targets for those with liquidity.A large proportion of the junior universe continues to face financial

difficulties. Although investors have demonstrated appetite for

secondary financing, much of this is aimed at the larger entities

with current or near-term production opportunities. There has

been less consolidation activity at the smaller end of the market

than expected, but because financing remains hard to come by and

asset inactivity continues, many of these entities will be forced to

take action or face asset relinquishment.

Top 10 transactions by value

2008 2009

Dealvalue(US$b)

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Largest announced deals of the year by value

Announced Buyer Seller Deal type Value (US$m)

14/12/09 Exxon Mobil Corp XTO Energy Corporate $40,992

23/03/09 Suncor Energy Petro-Canada Corporate $20,683

24/06/09 CPC; Sinopec Addax Petroleum Corp Corporate $9,022

01/11/09 Denbury Resources Encore Acquisition Co. Corporate $4,465

21/10/09 KNOC Harvest Energy Trust Corporate $4,148

07/04/09 Gazprom Eni SpA; Gazprom Neft Asset $4,104

17/04/09 CNPC; KazMunaiGas Central Asia Petroleum; Mangistaumunaigas Corporate $3,300

05/08/09 Petrobank Energy & Resources TriStar Oil and Gas Ltd Corporate $2,547

30/03/09 AFK Sistema Ural-Invest LLCAgidel-Invest LLCInzer-Invest LLCYuryuzan-Invest LLC

Corporate $2,500

10/07/09 Centrica plc Venture Production plc Corporate $1,747


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Continuing decrease in transaction activityduring 2009

The downstream sector experienced further decline in transaction

volumes during 2009, continuing the downward trend which

started in the previous year. There were 153 transactions in the

sector in 2009, some 30% lower than 2008. The disclosed value

of downstream transactions was US$38b in 2009 compared to

US$40b a year earlier.

The diverse buyers involved in downstream transactions included

IOCs, NOCs, independents and private equity. Based on disclosed

values, the top 10 deals in the sector during 2009 had a combined

value of US$24b, accounting for some 65% of the disclosed value

of all transactions in the sector globally.

Included in the largest announced transactions of the year were

Enterprise Products Partners acquisition of TEPPCO Partners for

US$5.9b, E.ONs sale of its wholly owned subsidiary Thga AG to

the municipal buyer consortium Integra/KOM9 for US$4.3b, and

Snam Rete Gas S.p.A.s (Snam Rete) acquisition of Enis naturalgas distributor Italgas S.p.A (Italgas) for US$3.8b. Snam Rete is

50.03% owned by Eni and Italgas was wholly owned by Eni. As a

result of this divestment, Eni has exited regulated gas distribution

activities in Italy, as required by the local regulators.

Similar to 2008, the volume and disclosed value of asset

transactions exceeded those that were corporate in nature. There

were 127 announced asset transactions with a disclosed value of

US$19.2b, compared to 26 corporate transactions with a disclosed

value of US$18.7b. Over 45% of downstream transactions volumes

were in North America (70), with Europe (38) and Asia (21)

together accounting for a further 40% of volumes.

No shortage of refining opportunitiesin 2010

World oil product demand is estimated to decline by 2.5 million

barrels per day during 2010 due to the economic downturn.

Recovery in oil product demand in the short term is anticipated

to be slow due to the weak global economic growth and could

potentially be significantly dampened should the US Senate vote

favourably on a comprehensive carbon regulation.

As such, there is significant over-capacity in the global refining

sector, predominantly in North America and Western Europe.

Furthermore, additional refining capacity scheduled for the short

term, particularly in Asia and the Middle East, would exacerbate

this issue.

Excess refining capacity is one of the principal factors fueling the

current environment of low utilisation and low margins. Refiners

are looking to address these issues through one or a combination

of the following:

Partial shutdowns of key refineries and of full shutdowns of

less complex sites

Postponing new refining capacity and upgrading projects

Divestment of non-core refining assets

There were 13 refining transactions during 2009, and a

number of refineries are currently being divested. We expect

that the major integrated oil companies, as well as independent

refiners, will continue to divest their non-core refining assets

throughout 2010. There is likely to be interest from various

groups of buyers, including those from Asia, for the relatively

complex refining assets.On the other hand, interest for relatively simple refineries

is expected to be low and would probably end up being

converted as storage facilities to defer expensive remediation

and clean-up costs.

Downstream


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No shortage of retail marketingopportunities

Plans by major integrated oil companies for expansion or

improvement of their retail marketing networks in developed

countries will continue to be trimmed, primarily driven by:

Strategic focus on upstream in part due to the higher level ofreturns but also because integrated oil companies are judged

on their ability to replenish reserves. Hence capital expenditure

is weighted towards exploration and production.

Prioritization of limited downstream capital expenditure

towards growth regions such as Asia.

There were 27 retail marketing transactions during 2009. In 2010,

we expect that major integrated oil companies will continue with

their divestment plans to exit from mature retail markets, driven

by a combination of increasing network maintenance requirements

and challenges in reaching required economies of scale.

In general, as marketing margins are usually more robust thanrefining margins, we expect to see continuing interest from various

parties for retail marketing assets, particularly those with decent

throughputs, strong non-fuel offerings and an ability to benefit

from existing supply arrangements.

2008 2009

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Transaction activity plunged in oilfield services in 2009.

From the highs of Q2 2008, when IHS Herold recorded 73

announced transactions with a combined value of more than

US$13b, by Q1 2009 transaction levels had slumped to just

13 deals, with a total value of below US$1.4b (based on deals

where transaction values were disclosed). The evaporation

of funding, the impact of lower oil prices and cutbacks from

operators were the chief causes.

An analysis of deal statistics reveals some interesting trends.

Based on transactions where the deal value was revealed, the

average value fell year-on-year from US$237m to US$192m.

This reflects the near-impossibility of concluding billion-dollar

buyouts for a period in 2008-09. In 2008 there were seven

deals greater than US$1b in disclosed value, with financial

investors such as Alpinvest, First Reserve and JC Flowers

among the investors. Last year there was just one, and it

was a trade deal (Baker Hughes acquisition of BJ Services

discussed on page 9). Even in the absence of mega-deals, a

handful of larger deals made up the bulk of the US$11.3b total

disclosed value of 2009 OFS transactions. The top ten deals

made up 76% of this amount. Excluding the Baker Hughes

deal, average transaction values were more than halved

compared to 2008, to US$110m.

Looking at transactions by geography, North America

continued to be the most active market for mergers and

acquisitions, with 60% of deals involving a target primarily

located there. This proportion was unchanged from last year.

Although it is risky to draw strong conclusions based on such

a quiet market, Asia and Africa were comparatively active

with 26% of all deals taking place there, up from 15% last year

(though the actual number of deals was lower). European

deals fell sharply from 21% of the total to 13%.

The year was not without excitement on the corporate front

however. Three themes were notable:

Buyers who entered this phase of the cycle with strong

balance sheets took advantage of others distress to

complete opportunistic bolt on deals.

Money could still be found for top-quality transactions.

Deal flow and expansion planning began to pick up towards

the end of the year.

Opportunities in adversity

Despite the doom and gloom in the market, numerous major

oilfield services (OFS) companies entered the downturn with

strong balance sheets, having elected to hold on to cash rather

than spend it on acquisitions at the top of the market in 2008.

Some players began to put these war chests to use. FTSE250-

listed John Wood Group, for example, said at the start of the yearthat it expected to see opportunities, and that the extension of

its 950m loan facilities would enable it to pursue them. By the

end of the year, Wood Group had concluded several transactions,

in Europe, the Americas and Asia-Pacific including the US$38m

acquisition, for cash, of Baker Energy the energy business

of Michael Baker Corporation, the energy and engineering

consultancy listed on the NYSE Amex exchange.

A second trend was a rise in distressed sales, where deals were

done, often at nominal prices, to take assets and sometimes

liabilities off the hands of sellers who were retrenching to focus

on core operations. One indicator of this shift is the increase in

the proportion of deals that comprised the trade and assets of a

business, as opposed to corporate transactions. In 2008, less than

one-third of OFS deals were sales of the trade and assets; a year

later, 54% of deals were in this form.

Oilfield services


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A good deal can still be done

There was a handful of landmark deals during the year. Pick

of the bunch is surely Baker Hughes US$5.5b acquisition of

BJ Services, announced in August. This was the biggest OFS

transaction in more than a decade. It represented 44% of the

disclosed value of all deals during the year.

BJs pressure-pumping expertise technology to increase

production by injecting water and chemicals into wells was a

key driver for uniting the two Houston-based businesses, with

Baker Hughes forecasting that this side of its business will grow

from its present 1% of revenues in 2008 to more than 20% post-

acquisition. Transforming this side of the business will enable

Baker Hughes to catch up on its major OFS competitors in the

sector, such as Schlumberger and Halliburton. The deal was

priced at a 16% premium to BJs pre-announcement stock price,

and was paid in a combination of cash and shares, leaving BJ

stockholders with a stake of around 27.5% in Baker Hughes.

BJ, spun out of Baker Hughes in the 1990s, had long been

touted as a natural fit in an environment where the integrated

OFS model is popular once more. The deal was done in the

region of 6.9 times trailing EBITDA, although BJ had recently

posted a Q3 net loss of US$32.3m. BJs shares rose 4.2% and

Baker Hughes fell 9.6% as the deal was announced.

By way of contrast, one of the top UK transactions was the

June acquisition of Wood Mackenzie, the Edinburgh-based

consultancy and research provider to the global energy,

metals and mining sectors. While Woodmac is not a typical

OFS business, the deal was important because it showed that

leveraged deals could still be done a trend that emerged

across several industries as the year wore on and that

mainstream (as opposed to specialist) private equity houses

were still keen to get oil and gas exposure. It was a positive sign

of the rising market that by the end of the year the Woodmac

deal no longer held the crown for the biggest UK private equitydeal of the year.

The 553m deal, concluded in a matter of weeks, was a

landmark for leveraged deals. Private Equity News reported that

four equity providers were shortlisted to back the deal: Bain

Capital, Charterhouse, Hellman and Friedman, and Warburg

Pincus. On the banking side, the deal was backed by 170m

of debt (as well as 70m of mezzanine finance). The lenders,

including HSBC, Lloyds Banking Group and Nomura, had

syndicated their loans, according to Private Equity News.

The deal also relieved pressure upon Candover, which was in the

middle of a stabilization program. Its shares rose more than 10%

on 19 June, when JP Morgan Cazenove predicted proceeds ofthe sale would revalue Candovers portfolio upward by 18%. Sale

proceeds to Candover itself were 36.2m.

Recovering deal activity to continueinto 2010

By Q4, deal volume had clearly picked up from Q1s slow start,

as the graph shows. The examples given above suggest a

number of positive trends for 2010, buy it may take longer to

play out fully. Funding conditions, both on the debt and equity

sides, are improving as private equity begins to refocus on

external opportunities rather than managing existing portfolios.As valuation expectations of sellers adjust from the heady days

of 2007, trade buyers are back in the game. The public markets

are recovering and a number of privately held OFS companies

are being positioned for possible flotation. As operators plan

new capital expenditure in a healthier oil price environment,

pricing pressure reduces and order backlogs build up, it seems

unlikely that 2010 will be as quiet for OFS transactions as 2009.

2008 2009

Announcedtransactionvo

lumes

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Q1 Q2 Q3 Q4

Breakdownoftransactions

Baker Hughes' acquisition

of BJ Services

Other top 10 dealsby value

Remaining deals wherevalue disclosed (57 deals)


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Propositions and credentials

Our Transaction Advisory Services team works with some of the

worlds largest organizations, fastest-growing companies and private

equity firms on some of the biggest and most complex cross-border

deals in the global market. We can help you achieve the growth,performance improvement and returns your stakeholders expect.

We offer integrated, objective advisory services that are designed

to help you evaluate opportunities, make your transactions more

efficient and achieve your strategic goals. We have an extensive

global reach, with 8,700 transaction professionals worldwide, and

the experience of thousands of transactions across all markets

and industry sectors. We can bring together the people you need,

wherever you need them, to focus on helping you achieve success

throughout the transaction lifecycle and beyond. Whether its a

merger, acquisition, strategic alliance, divestment, equity offering

or restructuring, we offer you the advice you need to help you

make the right deal at the right price at the right time. Its howErnst & Young makes a difference.


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Global Oil and Gas Transactions Review 2009

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