North America Oil, Gas Resources Main Focus of 2012 M&A Activity

Upstream oil and gas assets remained the focus of merger and acquisition (M&A) activity in 2012, with the total value of energy deals done last year rising to $321.5 billion from $300.6 billion in 2011, according to Deloitte's year-end 2012 report on M&A activity in the oil and gas sector.

Rosneft's $61.6 billion acquisition of BP-TNK drove buyers' focus on upstream assets, but excluding this deal, North American unconventional and deepwater oil and gas plays remained the focus of M&A activity in 2012. A few major transactions near the end of 2012 bumped total M&A deal value higher, but the number of overall deals completed declined from 698 to 576 in most segments except downstream.

National oil companies and other larger international buyers remained active in North America and other markets as they continue to expand their resource base, said John England, leader of Deloitte's U.S. Oil & Gas and vice chairman of Deloitte LLP, in the report. These companies found the North American market attractive in 2012 due to:

North America's political stability and mature investment environmentInvestment opportunities in well-known North American resource plays with predictive resultsAccess to technology and workforce expertise which has driven the exploration and production boom in unconventional and deepwater resources in North AmericaPotential continued growth that could to an export market for North American resources

Global upstream oil and gas activity grew 50 percent to $253.4 billion last year, compared with $167.9 billion in 2011, while the number of deals grew 11 percent from 518 to 461. The hunt by international companies for North and South American properties should continue as countries such as China and India address their growing energy demands and diversify their portfolios. Large integrated companies should also be active buyers as they look to the market for new properties to offset production declines that have been prevalent among the majority of supermajors.

While M&A activity in the upstream sector remained brisk last year, the oilfield services sector was quiet, partly due to the steadily declining U.S. rig count during 2012. M&A transactions totaled $17.9 billion, a 54 percent decline from 2011, and the number of deals also declined from 97 in 2011 to 57 in 2012.

Softening demand in the second half of the year also put pressure on margins and on public company stock prices, making companies less capable or interested in doing transactions. The shift by producers from dry gas to liquids also forced oilfield companies to relocate resources and services, creating inefficiencies and overcapacity in some areas and a struggle to reposition resources and labor to emerging liquids areas.

However, "2013 may be a year when M&A activity rebounds in the onshore oilfield services sector, as sellers become more realistic about pricing and consolidation," England commented.

Midstream M&A also slowed from the rapid 2011 pace, but activity remained at historically high levels, and continued to focus on transactions that will facilitate serving of the North American shale plays. Midstream M&A total value reached $35.6 billion in 2012, down from $84.5 billion in 2011.

"Growth in the midstream pipeline and processing infrastructure has not kept pace with growth in the unconventional resource plays, providing many opportunities for capital investment that we expect to lead to more midstream deal activity in 2013," England noted, adding that Deloitte believes that some bigger players could enter the market, some consolidation to take place, or a combination of both, if the midstream segment is going to continue supporting shale and tight oil activity in the United States.

Downstream M&A activity held steady, with the value of deals rising to $14.6 billion for 2012 from $11 billion in 2011. The downstream sector has been through a major reshuffling in the past two years, with the spinoff of downstream businesses of two large integrated oil companies and two significant refinery dispositions by BP. Independent companies now mainly dominate North America's refining industry after once being controlled by large integrated firms.

"U.S. refiners in general have seen their underlying business fundamentals greatly improve over the last two years, as a result of fundamental prospects and valuations being highly dependent upon geographic location and access to cheap crude and pipeline capacity," England noted.

Crude oil prices, which have settled into a stable range, set the stage for greater confidence around upstream oil investments. U.S. natural gas prices, which have traded at historic lows thanks to the U.S. shale gas exploration boom which has significantly increased supply, are not expected to rebound significantly in 2013, but deal activity may grow in the exploration and production and service areas.

"At some point the valuations in the natural gas area become so attractive that buyers with a long-term strategy could make a good deal of money," said Roger Ihne, principal with Deloitte Consulting LLP, in the report.

Thanks to technological advancements in drilling and production, the number of completions in North American fields has risen, and Deloitte expects to see improvements not only in cost effectiveness but in safety as well.

However, industry executives and other deal market participants should keep an eye on regulatory direction in the upcoming second term of the Obama administration, England noted. The oil and gas industry has been targeted by some groups in Washington looking for sources of new tax revenues, and whether they achieve the desired results could affect activity in the coming year.

"As the U.S. oil and gas industry and its activities become larger and more publicly visible across the multiple shale and tight oil basins, it is incumbent upon companies to be particularly diligent in following the evolving regulations and be sensitive to environmental concerns as these new plays are developed," England commented.

Karen Boman has more than 10 years of experience covering the upstream oil and gas sector. Email Karen at kboman@rigzone.com.

Generated by readers, the comments included herein do not reflect the views and opinions of Rigzone. All comments are subject to editorial review. Off-topic, inappropriate or insulting comments will be removed.

View the original article here