A robust mergers & acquisitions market in the latter half of 2011, particularly in midstream, bodes well for deal making in 2012, according to Deloitte's Center for Energy Studies. But world events could throw a wrench into the M&A machine, as Russell McCulley reports.
The deal market picked up in the second half of 2011 after a slow start to the year, according to Deloitte's Yearend 2011 Oil & Gas Mergers & Acquisitions Report, released in February. While the total number of 2H 2011 deals decreased – there were 240 transactions in 2H 2011, compared to 258 in 2H 2010 – the value of those deals was up a sharp 29%, from $120 billion to $155 billion.
That boost was due in large part to the $41 billion acquisition of El Paso Corp by Kinder Morgan, which created the largest midstream energy company in North America.
Despite some financial market turmoil related to the European debt crisis, steady oil prices helped propel M&A activity. And Deloitte analysts expect the trend to continue throughout 2012, as long as oil prices remain above $80 per barrel.
While unconventional gas still drives much deal making in North America, weak gas prices have refocused near-term investment on oil and natural gas liquids. Overall, deals in the exploration & production arena were down 29% in 2011 from 2010 levels, said Roger Ihne, a Deloitte principal and leader of the company's energy portfolio, at a Houston conference announcing the report. But that was more than made up for in the midstream and oilfield services sectors, he said: ‘Two of the top three deals from 2011 were actually in the midstream area, something we would never have expected.'
Midstream deal count in 2H 2011 was roughly on par with 2H 2010. But the Kinder Morgan-El Paso transaction helped send deal value for 2H 2011 to $65.1 billion, compared to $5.4 billion in the same period the year before.
The report examined mergers and acquisitions among oil & gas companies with values greater than $10 million. The analysis excluded several transactions between affiliated companies.
In the oilfield services sector, M&A activity was up as companies both large and small sought to expand product offerings for shale and deepwater producers, Deloitte said. Total oilfield services deal value rose in 2H 2011 to $14.1 billion, from $12.6 billion in 2H 2010.
E&P typically accounts for the lion's share of M&A spending, but with no ‘megadeals' on the record for 2H 2011, total E&P value declined to $73.1 billion from $93.5 billion in 2H 2010. The number of transactions for the half fell to 158, from 189 in the same period a year earlier. The overall decline in E&P spending in 2011 was largely due to a drop in asset transactions, while corporate deals held fairly steady, said Trevear Thomas, a principal with Deloitte Consulting. Foreign companies are entering joint ventures to shore up reserves in North American unconventional gas and deepwater, a trend that is likely to continue in 2012.
‘Foreign investment in JVs is an attractive model,' Thomas said. The outlook for 2012 is ‘a steady and robust environment as it pertains to E&P M&A, for a couple of reasons,' he said. ‘One is the need for massive investments to exploit exploration and production opportunities. That's going to require very strong balance sheets. Secondly, from a US perspective, the capital markets have improved.'
Independent gas producers could become targets for larger entities with deeper pockets if gas prices remain depressed, which is likely, Thomas said. ‘So I see consolidation occurring just from that perspective, because some of these independents won't be able to withstand this low gas price environment.'
With activity in the Gulf of Mexico picking up following the Macondo drilling moratorium – in December, the US Interior department held the first offshore lease sale since the April 2010 spill – deepwater E&P holds promise for more M&A activity, said Ihne.
‘There were some deals last year,' he said, including Ensco's $7.3 billion acquisition of Pride International, finalized in May. ‘The largest oilfield services deal was the merger of two offshore drillers. We are seeing deal activity not only in shale and unconventional but also in deepwater. Deepwater is still a hot play.'
The M&A market remained fairly buoyant last year despite political upheavals in the Middle East and North Africa, including oil-rich Libya. ‘It was interesting that we didn't see more impact last year' from the so-called Arab Spring, Ihne said, while adding: ‘The industry always spends about the same amount of money. But where they spend it is different.'
Deloitte's generally bright outlook for 2012 M&A activity could change if some dark clouds continue to gather, including increasing tension between Iran and the West.
‘The European [debt] crisis could upset that,' Ihne said, when asked what factors could reverse the M&A upswing. ‘And if China were to slow down even more dramatically than they have.'
And a flareup in the Middle East, he concluded, could put the brakes on M&A for some time. OE