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We concluded our publication last year by predicting that The positive trends that we have seen in recent months are likely
the global economic downturn may lead to a slowdown in oil to continue into 2010, and the outlook for oil and gas transactions
and gas activity in the next 12 months, but the longer-term is healthy in upstream and oilfield services. In the downstream
fundamentals remain favorable. 2009 has indeed been a year of world, over-capacity in some regions is likely to drive a longer
considerable challenge for many, but opportunity for some, and period of uncertainty and transactional challenges. But as this
the fundamental outlook for the sector continues to look positive. year has aptly demonstrated, one person’s challenge represents
It’s clearer a year later that there is light at the end of the tunnel, another’s opportunity.
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.
2009 has witnessed the much speculated green shoots of need, such as Asian NOCs with growing energy-hungry economies
recovery in the upstream sector. The oil price has strengthened, and gas utilities seeking a physical hedge. Deal activity within the
equity capital is starting to flow back into the sector, development independent sector has been lower.
projects are coming back on stream with increasing frequency,
and stronger exploration budgets are being set for 2010.
Corporate deal volumes on the up through a
However, the year has been uncomfortable for many across the
period of more depressed share prices
sector. The mixed fortunes of the upstream universe continues
to leave a wide divide between the haves and have-nots. The Despite the increased M&A activity in the second half of the
increased oil price may have generated a flurry of equity year, transaction volumes fell short of 2008 levels, with 605
investment, but funding constraints continue to affect many, be upstream transactions announced in 2009 versus 730 in 2008.
it equity or debt, and the success of proposed IPOs in 2010 will Significantly, asset deals showed a 22% drop in volume from 2008
be carefully monitored. Companies’ increased cost of capital levels while the number of announced corporate transactions,
has not necessarily been factored into transaction valuation was consistent with 2008 levels, accounting for 21% of deals by
methodologies as much as might be expected. transaction volume and over 70% by deal volume as acquirers
looked to take advantage of depressed market pricing.
Commodity pricing, another key valuation parameter, has not
been universally positive either. Oil has spent the second half The combined value of announced deals in 2009 was US$149b
of the year hovering around the anticipated US$70 per barrel according to data from IHS Herold Inc. comparing favorably to the
mark, a welcome improvement for many from the mid-30s seen US$112b in 2008. However, two transactions made up US$62b
at the start of the year, but there is an ongoing short-term pricing of the value being Exxon Mobil’s announced deal with XTO and
concern given depressed levels of global demand and surplus Suncor’s acquisition of Petro-Canada.
OPEC capacity. Natural gas pricing has had a tougher year,
and possible development projects continue to face delays as North America continues to be the most
companies wait for improved pricing and stability.
active market
In a year of ups and downs for the industry, M&A activity began
A little over 50% of global upstream deals announced in 2009 were
to pick up pace, increasing by volume quarter by quarter over
in North America, down from the 80% bias that we reported last
the first three quarters of the year. Improved access to funding
year. While Canadian volumes were consistent, 2009 witnessed a
and relative economic stability have encouraged those that can
42% drop in US deal volume. This is a clear demonstration of the
to take advantage of reduced valuations and less competition
market impact of difficult funding conditions and a challenging
for opportunities. This has largely been to the benefit of well-
short-term natural gas outlook in North America.
capitalized organizations with a long-term commodity outlook or
160
800 140
Deal value (US$b)
120
600
Deal volume
100
80
400
60
40
200
20
0 0
2008 2009 2008 2009
300
250
Deal volume
200
150
100
50
0
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Number of transactions 2008 Number of transactions 2009
In terms of deal value, North America accounted for over 65% of Government-sponsored, such entities typically rely less on
announced transaction values according to IHS Herold Inc, with 5 external financing, which is a key advantage in a funding-
of the 10 largest transactions targeting North American reserves. constrained market. Sinopec’s US$9b acquisition of Swiss oil
Exxon Mobil’s announced US$41b acquisition of XTO in December explorer Addax, announced midway through the year, and KNOC’s
and Suncor’s US$21b acquisition of Petro-Canada in March were US$4b acquisition of Harvest Energy Trust in October are among
the year’s largest announced transactions, and are reflective of the top five transactions by value this year. Both transactions are
a longer-term outlook being taken on unconventional resources, representative of Asian NOCs, recent international expansion and
such as oil sands and shale gas, from the larger independents and deep pockets — Chinese NOCs, for example, have spent almost as
International Oil Companies (IOCs). More generally, however, the much this year on upstream investments as they have over the
relative weakness of natural gas prices in the US shifted acquisition last five years combined. Their focus isn’t just on conventional
activity back to conventional reserves; oil represented about reserves — PetroChina’s US$1.7b purchase of a majority stake
50% of acquired US proved reserves for the year until Exxon’s in undeveloped steam assisted gravity drainage (SAGD) projects
announcement swung the bias back to natural gas. represents the largest Chinese NOC acquisition in the Canadian oil
sands to date.
US private equity activity in the upstream sector showed strong
signs of improvement during the second half of the year. Sizeable
private equity investments included: Global Infrastructure IOC-NOC joint ventures are indicative of
Partners’ investment of US$588m in Chesapeake Midstream
future trends
Partners; First Reserve Corporation’s US$500m investment in
Southeast Asia-focused KrisEnergy; Apollo Global Management’s We anticipated at the start of the year an increasing likelihood of
US$500m acquisition of Parallel Petroleum; and KKR’s US$350m additional strategic partnerships between NOCs and IOCs. These
investment in East Resources. We anticipate a renewed interest in arrangements offer reserve-hungry NOCs access to reserves
the sector from private equity through 2010. There is, however, and experienced international partners, while the IOCs benefit
a backlog of businesses to exit that may affect the quantity and from access to capital and potentially service or infrastructure
timing of new investments. capabilities. Many of the recent license awards in Iraq exemplify
this theme.
Asian NOCs funding rapid expansion Looking forward, things may be less positive for IOCs in these
arrangements as we predict that reserve-seeking NOCs in
National oil companies were the focus for much of the M&A certain areas may partner directly with other reserve-holding
speculation in 2009, targeting reserves and production to NOCs, leveraging political ties to access opportunities and
support continued domestic economic growth. Being expand operations.
NOCs have arguably been more active than the majors in 2009, 20
but Exxon Mobil’s announced acquisition of XTO may be the trigger 0
for a wave of acquisitions as the majors emerge from a year of 2008 2009
restructuring and internal reorganization with balance sheets that
are stronger than many, certainly looking across other industries.
50 250
Deal value (US $b)
40 200
Deal volume
30 150
20 100
10 50
0 0
2008 2009 2008 2009
Breakdown of transactions
70 Baker Hughes' acquisition
of BJ Services
60
Other top 10 deals
50 by value
40 Remaining deals where
value disclosed (57 deals)
30
20
10
0
Q1 Q2 Q3 Q4
2008 2009
A good deal can still be done The £553m deal, concluded in a matter of weeks, was a
landmark for leveraged deals. Private Equity News reported that
There was a handful of landmark deals during the year. Pick four equity providers were shortlisted to back the deal: Bain
of the bunch is surely Baker Hughes’ US$5.5b acquisition of Capital, Charterhouse, Hellman and Friedman, and Warburg
BJ Services, announced in August. This was the biggest OFS Pincus. On the banking side, the deal was backed by £170m
transaction in more than a decade. It represented 44% of the of debt (as well as £70m of mezzanine finance). The lenders,
disclosed value of all deals during the year. including HSBC, Lloyds Banking Group and Nomura, had
BJ’s pressure-pumping expertise — technology to increase syndicated their loans, according to Private Equity News.
production by injecting water and chemicals into wells — was a The deal also relieved pressure upon Candover, which was in the
key driver for uniting the two Houston-based businesses, with middle of a stabilization program. Its shares rose more than 10%
Baker Hughes forecasting that this side of its business will grow on 19 June, when JP Morgan Cazenove predicted proceeds of
from its present 1% of revenues in 2008 to more than 20% post- the sale would revalue Candover’s portfolio upward by 18%. Sale
acquisition. Transforming this side of the business will enable proceeds to Candover itself were £36.2m.
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 BJ’s pre-announcement stock price, Recovering deal activity to continue
and was paid in a combination of cash and shares, leaving BJ into 2010
stockholders with a stake of around 27.5% in Baker Hughes.
By Q4, deal volume had clearly picked up from Q1’s slow start,
BJ, spun out of Baker Hughes in the 1990’s, had long been as the graph shows. The examples given above suggest a
touted as a natural fit in an environment where the integrated number of positive trends for 2010, buy it may take longer to
OFS model is popular once more. The deal was done in the play out fully. Funding conditions, both on the debt and equity
region of 6.9 times trailing EBITDA, although BJ had recently sides, are improving as private equity begins to refocus on
posted a Q3 net loss of US$32.3m. BJ’s shares rose 4.2% and external opportunities rather than managing existing portfolios.
Baker Hughes’ fell 9.6% as the deal was announced. As valuation expectations of sellers adjust from the heady days
By way of contrast, one of the top UK transactions was the of 2007, trade buyers are back in the game. The public markets
June acquisition of Wood Mackenzie, the Edinburgh-based are recovering and a number of privately held OFS companies
consultancy and research provider to the global energy, are being positioned for possible flotation. As operators plan
metals and mining sectors. While Woodmac is not a typical new capital expenditure in a healthier oil price environment,
OFS business, the deal was important because it showed that pricing pressure reduces and order backlogs build up, it seems
leveraged deals could still be done — a trend that emerged unlikely that 2010 will be as quiet for OFS transactions as 2009.
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 equity
deal of the year.