Deloitte: Oil, gas M&A activity near pre-recession level

Nick Snow
OGJ Washington Editor

WASHINGTON, DC, May 20 -- Oil and gas mergers and acquisitions have returned to a level near where they were before the 2008-09 recession, two experts said on May 20. More than half the deals involve upstream assets because that’s where the highest value is, they said during a breakout session at Deloitte’s 2011 Energy Conference.

North America still makes up more than 50% of total global oil and gas M&A activity as national oil companies and sovereign wealth funds have become aggressive acquirers, observed Jim Dillavou, who leads the financial service firm’s energy M&A practice. Deals involving unconventional supplies have nearly doubled since 2007, he said.

About a third of the oil and gas M&A deals worldwide in the past 18 months have involved resources in shale formations, with a nearly even split between oil and gas, according to Hugh D. Babowal, managing director and head of energy and power mergers and acquisitions at Wells Fargo Securities LLC. Producers are moving toward more oily and liquids-rich plays because crude prices are around $100/bbl, he said.

Foreign investors are seeking more joint ventures than passive stakes to take a more active development role because they want North American technology as well as financial returns, Babowal said. That’s making it easy to raise capital, which is on track in 2011 to meet or exceed 2009 levels, he added.

“Equity issues, which were around $15 billion in 2009, rose to $21 billion in 2010,” he said. “More companies are doing [initial public offerings].” Energy debt capital costs have dropped from 10% to 6%, while equity valuations are up by 28%, Babowal said.

Smaller players exit
Babowal and Dillavou agreed that growing costs both offshore and in shale plays could raise transaction totals higher and make smaller producers depart. “A producer with a third of its holdings in an offshore property may decide that it’s a high-quality asset, but the risks are too great,” said Babowal. “It might sell out to a larger producer where the asset wouldn’t represent as big a part of its total portfolio.”

Gas properties remain attractive because basis differentials have flattened from 2008 across the US thanks to more pipeline capacity and shale gas production, he noted. After midstream acquisitions reached $18.5 billion in 2010, master limited partnerships which grew organically are beginning to look more closely at possible acquisitions, he said. Companies which bought pipelines in the early 2000s from financially overextended energy trading giants want to extend their reaches upstream with header and gathering systems, he added.

Gas storage valuation multiples also have rebounded despite narrow summer/winter spreads, Babowal said. “As the US makes the transition to gas-centric energy, storage will become more valuable,” he said. “From our interaction with buyers, location is very important. If the asset is close to multiple pipelines and markets, interest is high.

He also expects refining, which is not as attractive, to produce some deals. “The amount of money that’s flowing into the energy M&A market is incredible,” Babowal said. “Private equity firms are looking at a wide range of assets and different ways to structure transactions.”

Contact Nick Snow at

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