Oil and gas deals follow oil price over the cliff says PricewaterhouseCoopers report

Deal value reduced progressively throughout 2008 before following the oil price over the cliff in the final quarter as the financial crisis intensified and economic conditions deteriorated. Companies slammed on the breaks in the final quarter with total oil and gas deal value down 59% on 2007 levels and 72% compared with the final quarter high of 2006.

Simon Venables, SA transaction services leader, PricewaterhouseCoopers comments:

“Even prior to the economic crisis and oil price plunge, big deals were in retreat. There were only two deals that topped the US$5bn mark in 2008 compared with ten such deals in 2007. The hiatus in big deals was especially evident in the oilfield sector.”

Six of the top ten 2008 oil and gas deals were purchases of natural gas assets. Five of the six were ‘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.

Simon Venables, SA transaction services leader, PricewaterhouseCoopers said:
“The rush to develop Australian coal bed methane gas assets for LNG export helped catapult Australia’s share of worldwide oil and gas deal value up tenfold. Upstream deal value in Australia multiplied from US$1.7bn in 2007 to US$16.6bn in 2008.”

Chris Bredenhann, South African Oil and Gas industry leader, PricewaterhouseCoopers said:
“Along with Australia, Africa was the only territory where total deal value increased from 2007 to 2008. African deal totals were boosted by the US$2.2bn sale by Devon Energy of its oil and gas business in Equatorial Guinea to the country’s national oil company GEPetrol. The sale was part of a US$3 billion African divestiture programme by the company.”

The immediate outlook for oil and gas deal-making is 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.

Chris Bredenhann, South African Oil and Gas industry leader, PricewaterhouseCoopers said:
“For the likes of Chinese companies, 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.”

Deal makers
The biggest deals were two table-topping US$5.8bn gas deals – ConocoPhillips’ investment in Origin Energy’s coal seam methane gas assets and Royal Dutch Shell’s agreed offer for Canadian company Duvernay.

Deal places
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 slowed everywhere during the year as financial and market conditions deteriorated. Deal activity was subdued in the Russian Federation with numbers down to 33 from 41.

Simon Venables, SA transaction services director, PricewaterhouseCoopers said:
“The fall in North America oil and gas deal volume accelerated sharply in 2008. Total deal value fell 43% from US$129.7bn in 2007 to US$73.6bn in 2008. Deal numbers were down by 8%.”

Activity in Europe was relatively resilient compared to the big fall in volume elsewhere. Deal numbers rose 64% from 77 to 126 and the total deal value was down 15% compared to a 38% drop worldwide.

Deal value in the Asia Pacific region shot up by 73% from US$13.2bn in 2007 to US$22.7bn in 2008. This dramatic rise in volume was driven by deals to acquire Australian gas assets.

Climate change and deals

Chris Bredenhann, South African Oil and Gas industry leader, PricewaterhouseCoopers said:
“Although carbon risks are rarely a significant factor in oil & gas deals today, emerging climate regulation is likely to change this. 2009 is set to be a milestone year for climate policy, whether at the international, regional or national level. As the world slowly develops a patchwork of carbon regulation including taxes, standards and potentially linked cap-and-trade programmes, companies will need to consider how to account for carbon in deals. It is likely investors will start asking more questions of companies. While carbon only has a marginal impact on the sector’s investment decisions today, the market will expect increasingly sophisticated treatment of carbon in deals, particularly those with a mega carbon aspect – such as coal-to-liquids or oil sands projects.”

The immediate outlook for oil and gas deal-making is subdued. Constrained debt markets, depressed equity prices and commodity prices looks set to stall significant deal-making in the early part of 2009. An opening of the equity markets will be followed by the debt markets which will allow financing to become available.