Oil & gas deals: 2008 annual review

Download Oil & gas deals: 2008 annual review: Mergers and acquisitions activity within the global oil and gas market (2.4MB)

Mergers and acquisitions activity within the global oil and gas market

O&G Deals 2008 reviews M&A activity in the oil and gas industry. We examine both the rationale behind the overall trends and look at the key individual deals.

2008 was the "Tale of Two Halves," starting with a fairly robust number of transactions for the first half of the year, until commodity prices began a steep decline and deal activity slid alongside them. By the fourth quarter, deal activity had all but dried up, with several potential deals being cancelled and no new major deals announced.

The increase in deal numbers was wholly attributable to upstream activity and smaller deals below US$0.5 billion. In contrast, there were significant falls in the number of larger value deals and a big falling-off of very large deals. There were only two deals that topped the US$5 billion mark in 2008 compared with ten such deals in 2007.

Reserves acquisition, rather than acreage, accounted for 94% of total 2008 upstream deal value. Companies continued to seek growth primarily through acquisition as opposed to exploration as the oil price soared in the first half of the year. Purchases in relatively stable locations such as Australia and Canada featured strongly as companies looked to safe havens to secure reserves to meet future energy demand.

Like the oil price, 2008 was a tale of ups and downs in deal numbers across different parts of the world. Year on year deal numbers were up in all territories with the exception of the dominant North American market and the Russian Federation. The pace of deal-making everywhere, though, slowed during the year as financial and market conditions deteriorated.

2008 Report highlights

Deals follow the oil price over a cliff

A slowing in O&G deal momentum, as measured by deal value, was evident from the start of 2008 compared with 2007. Deal value reduced progressively throughout 2008 before following the oil price over a cliff in the final quarter as the financial crisis intensified and economic conditions deteriorated. Companies slammed on the brakes in the final quarter with total O&G deal value down 59% on 2007 levels and 72% compared with the final quarter high of 2006.

Big deals in retreat

Even before the worsening of the economic climate and the oil price plunge, big deals were in retreat. There were only two deals that topped the US$5 billion mark in 2008 compared with ten such deals in 2007. The hiatus in big deals was especially marked in the oilfield services sector. The sector had been particularly dynamic in 2007 with three US$5 billion plus deals worth a total of US$31.4 billion. In 2008, the number of deals remained high, but the complete disappearance of US$5 billion plus deals meant total deal value in the sector nearly halved.

Gas grabs top spot

Six of the top ten 2008 O&G deals were purchases of gas assets. Five of the six were for ‘unconventional’ resources that require considerable technological investment. All of them were in Australia and North America reflecting the attraction of targets in stable locations close to end markets as companies responded to security of supply constraints. Indeed, the rush to develop Australian coal bed methane gas assets for LNG export helped catapult Australia’s share of worldwide O&G deal value up tenfold. Upstream deal value in Australia multiplied, from US$1.7 billion in 2007 to US$16.6 billion in 2008.

Deal target pencils sharpen

The immediate outlook for O&G deal-making in the early part of 2009 is bleak. However, while deal activity in the first half of the year looks set to remain subdued, it is difficult to see stronger players remaining on the sidelines for the whole of 2009 given the opportunities for acquisitions at low valuations. Many of the majors and national oil companies are in a strong position following a period of high oil prices. For companies from countries such as China the current market offers unrivalled opportunities to gain access which, in other circumstances, would be denied to them. Similarly, sovereign wealth funds and many private equity investors will be watching the sector closely.