Record year for global oil and gas transactions in 2012
- Upstream activity levels saw slight decline, but M&A spend rose significantly
- Downstream transactions declined marginally in 2012
SINGAPORE, 31 JANUARY 2013 – With an average of more than four transactions announced every day in 2012, the oil and gas sector has remained one of the most active global sectors for mergers and acquisitions. According to EY’s Global oil and gas transactions review, oil and gas transactions recorded a staggering US$402b in 2012, representing a 19% increase compared to 2011 (US$337b). Ninety-two transactions exceeded US$1b in value compared to just 71 in 2011. This was despite a marginal decrease in oil and gas transaction volumes from 1,664 deals in 2011to 1,616 in 2012.
Oil and gas transactions activity by segments
Upstream remained the most active segment with US$284b worth of transactions accounting for 71% of total deal values. North America continued to be the most dominant region for activity, accounting for approximately 52% of the upstream transactions volume. However, within North America, transaction volumes were supported by a rapidly growing Canadian deal market whilst the US market contracted.
Andy Brogan, EY’s Global Leader Oil & Gas Transaction Advisory Services comments: “2012 saw a continuation of trends we have seen for the last few years supported by a relatively benign oil price environment. The increase in the number of larger deals was a function of more capital becoming available to the right class of buyer together with increased pressure from asset and company owners to crystallize returns.”
Sanjeev Gupta, EY’s Asia-Pacific Leader for Oil & Gas adds: “The key themes underpinning upstream activity were International Oil Companies’ (IOCs) portfolio optimization, National Oil Companies’ (NOCs) international expansion and capital management in the mid-cap space – and these look set to continue to drive activity levels through 2013. Backed by robust cash reserves, the Asian NOCs remained active throughout 2012 in the transaction market. Major transactions were largely driven by the Chinese NOCs that focused on acquiring stakes in upstream assets in politically stable countries, particularly unconventional plays in North America and Australia.”
Transactions values in the downstream segment were flat at US$42b, with volumes also fairly stagnant at 162 transactions (6% lower than 2011). The decline is particularly evident in the US and South America, where transaction volumes have reduced by eight and seven transactions respectively. Growing demand and capacity, particularly in Asian markets, supported a brighter picture for other markets, albeit with relatively low transaction levels. In contrast, transactions volumes in Asia have increased by nine transactions as demand for oil products continues to surge in the region.
“Companies remain cautious in mature markets due to the continuing downside risks for oil product demand, driven by the uncertain economic outlook and austerity measures. Storage facilities that deliver global connectivity and trading potential remain attractive to acquirers, with conversion of refining facilities also being considered,” continues Gupta.
The number of transactions in the midstream segment in 2012 decreased by 19% from 111 in 2011 to 90 in 2012. The reported deal value decreased significantly, from US$87.3b in 2011 to US$50.3b in 2012 due to the absence of a blockbuster deal such as Kinder Morgan’s acquisition of the El Paso group. North America accounted for 78% of all midstream transactions, but this was a decline from the 83% dominance of the region in 2011. Midstream activity levels will likely continue to increase outside of North America as infrastructure ownership further disaggregates from upstream assets, driven by capital allocation and regulatory factors.
Oilfield services fastest-growing segment for a second year
The fastest-growing segment for transaction volumes was oilfield services, repeating last year’s healthy growth. Total oilfield service volume of 212 deals was up almost 10%. The aggregate deal value in 2012 dropped by a third to US$26b, reflecting the absence of deals with scale comparable to the US$8.7b Ensco-Pride merger of 2011. The biggest transaction of the year (US$2.9b) was conducted in Asia in which Malaysia’s SapuraKencana Petroleum Berhad and New York- and Oslo-listed Seadrill had agreed an MOU to combine their tender rig businesses.
Brogan says: “Financial investors showed an increased appetite for oilfield services transactions, playing a role in 3 of the segment’s top 10 deals. Access to new technologies, particularly around subsurface applications, which supports expansion into hard-to-access growth markets, fueled trade players activity.
Transactions activities by region
- Asian NOCs continued to invest in overseas acquisitions backed by robust cash reserves. Major transactions were largely driven by the Chinese NOCs that shifted focus slightly to acquiring stakes in upstream assets in more developed countries, particularly unconventional plays in North America. However, in contrast with the previous year, Asian NOCs made diversified acquisitions this year to balance and optimize their portfolios based on resources, expected economic returns and associated risks. Besides securing energy resources, Asian oil and gas companies, including NOCs, have been strategically expanding their downstream presence in developed economies to derive synergies with their growing global upstream production.
- Africa’s transaction volume increased from 93 in 2011 to 97 in 2012. Although there has only been a moderate increase in reported transaction volume with reported transaction values growing significantly with US$11.7b of deals in 2012, up from US$7.7b reported in 2012. Sinopec’s US$2.5b acquisition of Total’s 20% interest in Nigerian deepwater block OML 138, the largest oil and gas transaction in Africa during 2012, gave a significant boost to the average deal value. The expected outlook for 2013 is for greater deal flow and consistency with the 2012 regional trends.
- Australia’s transaction activity was again relatively subdued, primarily due to continued tight conditions in equity markets. The number of deals remained steady at 86 compared to 84 last year, with limited opportunities available for M&A activity. However, the deal value more than doubled from US$7.8b to US$16.2b. Consistent with 2011, most of the transactions (88%) were in the upstream sector. This trend is likely to continue into 2013. The major transaction focus of 2012 related to the continued commercialization of Queensland’s CSG-to-LNG developments and positioning for the future development of Western Australia’s Browse Basin gas reserves.
- Canada’s oil and gas industry continues to be very active. The volume of transaction activity in 2012 was up 18% compared to 2011 (228 vs. 193) but was dramatically higher in terms of deal values, led predominantly by the upstream sector. Deal value increased by 241% year-on-year, from US$15.2b to US$51.9b, mainly as a result of the US$15.1b CNOOC and US$5.8b Petronas deals. In 2013, Foreign investors will likely be placing renewed emphasis on entering strategic alliances and joint ventures, with Canadian domestic partners retaining some form of control.
- The CIS region showed significant activity and the landmark oil and gas transaction of the year. The deal value of transactions in 2012 tripled when compared to 2011 and reached US$77.3b, mostly as a result of the acquisition of TNK-BP by the Russian NOC, Rosneft. However, the number of deals was down slightly from 2011.
- Europe’s oil and gas sector delivered strong activity in 2012. Overall transaction volumes of 179 fell short of 2011’s 189 deals, but their combined value of US$29.3b exceeded the 2011 level of US$24.1b. Upstream, where European activity centers on the North Sea, delivered the greatest share of deal volume. Upstream transaction volume of 139 was down slightly from the 146 deals in 2011. Overall deal value of US$11.7b in 2012 compares with US$10.6b in 2011.
- India’s dependence on energy imports continues to increase given the country’s stagnant domestic production and heightened demand of oil and gas. Over the coming quarters, deal activity is likely to increase given the various initiatives to augment energy security in the country. India provides significant opportunities, especially in the upstream and LNG segments. State-owned companies are likely to forge partnerships with foreign companies to carry out E&P activities, especially in deepwater blocks, and to increase production from maturing domestic fields. At the same time, outbound deals are likely to increase as Indian companies step up plans to acquire oil and gas assets abroad.
- Middle East transactions in value terms remained concentrated in Kurdistan, with four of the five biggest deals concerning assets or operations on the oil-rich region of Iraq. Overall, there were 45 transactions in the MENA region, an increase of 14% over 2011. The size of transactions decreased with the average transaction size reducing from US$3.6b to US$2.8b. Looking forward, we expect activity to continue based on current trends with political uncertainty in North Africa continuing to depress activity there.
- The US’s oil and gas transaction market experienced a softening in 2012 vs. modest deal activity in 2011, but still remained over 10% above activity during the most recent oil and gas transaction cycle lows experienced in late 2008 and 2009. Overall, deal values decreased 10% in 2012 vs. 2011, while volume decreased almost 15% over the same period. US transactions still accounted for almost 40% of total global oil and gas transactions values and volumes during 2012, down from approximately 50% and 45% respectively, in 2011. The air of uncertainty looks set to remain for the coming year.
Outlook in 2013
Brogan concludes: “2013 appears to face many of the same geopolitical and economic uncertainties as 2012 and unfortunately these do not seem likely to be fully resolved soon. However, in the absence of material shocks, we currently expect the sector to continue to be resilient in M&A terms as the key strategic drivers remain the same and participants have become accustomed to making decisions in a highly uncertain environment.
“While capital availability is generally improving (especially debt), funding will remain a challenge for smaller companies for both debt and equity, and we continue to expect cash constraints coupled with cost escalation to be a driver for both asset and corporate opportunities. Those at the larger end of the scale with stronger balance sheets are likely to be the beneficiaries of this.”
On the prospects for the sector in Asia-Pacific, Gupta adds: “The Asian NOCs are expected to pursue overseas acquisition opportunities despite substantial economic worries and geopolitical uncertainty. Further, we expect more inbound deals in China and Australia due to an increase in unconventional and deepwater exploration activities. Australia may also witness more corporate transactions and consolidation among junior oil and gas companies as a result of equity capital markets remaining relatively tight. In the downstream segment, various groups of buyers from Asia with equity crude and oil traders are likely to be interested in the relatively complex refining assets.”
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