Worldwide upstream M&A unconventional resource spending reached record high $75 billion

NORWALK, Conn. – Fueled by national oil companies and international buyers making acquisitions in North American shale gas, shale oil and tight oil basins, global transactions involving unconventional oil and gas resources reached a record high $75 billion in 2011, according to the IHS Herold 2012 Global Upstream M&A Review, which was just released by information and analytics provider IHS (NYSE: IHS). This figure represents 48 percent of total 2011 worldwide upstream merger and acquisition (M&A) spending

“Cross-border buyers, led by Asian-based investors, continued to stream into North American unconventional resource plays through asset partnerships and select corporate deals, with a bullish view on potential LNG exports to the Asia-Pacific region in the coming decades,” said Christopher Sheehan, director of energy M&A research at IHS. “In 2011, high crude oil and international gas prices were juxtaposed against persistently depressed North American natural gas prices, leading to a 15-year high in deal counts outside North America.”
Total global upstream M&A transaction value, including corporate mergers, fell 30 percent from an all-time high in 2010, which was driven by massive asset divestiture programs. Corporate deal value in 2011 rose 19 percent to more than $58 billion, including BHP Billiton’s $15 billion takeover of unconventional resource-focused Petrohawk Energy, the first upstream corporate merger greater than $10 billion since the ExxonMobil-XTO deal in late 2009.
Sheehan noted the deal flow also increased in all regions outside the U.S. and Canada as international investors pursued the prolific oil discoveries that have occurred in recent years in regions such as deepwater Brazil and Africa. In Australia, the coal seam gas-to-LNG market consolidated further, and evolving markets such as Iraq’s Kurdistan region welcomed new entrants through M&A.
Said Sheehan: “These areas are enticing international investors who continue to face access barriers in established hydrocarbon basins such as Venezuela, Russia and in the Middle East. World-class oil assets continue to be highly sought after by both cash-rich national oil companies and international integrated companies that continue to struggle to materially grow reserves through the drill bit.”
In the international gas markets, growing Asian LNG demand will increasingly fuel merger and acquisition activity from Australia to East Africa. In these regions, Sheehan believes small-cap international E&Ps that own huge resources, but lack sufficient development capital, will increasingly be takeover targets, particularly as the European debt crisis has impacted their access to and the costs of capital.
U.S. transaction value in 2011 reached a 10-year high despite a lower deal count than the prior year, as large joint-venture asset acquisitions by overseas buyers fueled mergers and acquisition activity. The U.S. accounted for approximately 50 percent of global upstream M&A spending, well above its historical average. Producing oil assets commanded a large deal price premium to gas properties, with a growing focus on liquids potential in emerging basins.
“Established shale gas and emerging shale oil and tight oil plays in the U.S. are attractive to foreign buyers since these plays offer massive discovered resources with low exploration risk in a country with relatively high political and fiscal stability, versus other global regions such as the Middle East, Africa and Latin America. The longer-term potential of LNG exports to the Asia Pacific from Canada and the U.S. is a strategic driver of many of the cross-border shale gas acquisitions in North America,” Sheehan added.
Meanwhile, decade low deal pricing for conventional gas assets, and the upside from liquids-prone plays, attracted increased M&A spending by private equity buyers seeking to benefit from a longer-term North American natural gas price revival.
Continued uncertainty in commodity price direction, wide-ranging geographic oil and gas price spreads, fragile global economic conditions, and limited or higher cost access to capital for many upstream companies are challenging strategic decision making in the industry and causing a consensus gap between potential buyers and sellers.
Added Sheehan: “We believe that, in the present volatile environment, global upstream M&A consolidation will accelerate in 2012 and beyond as the well-financed ‘haves’ prey on the capital-constrained ‘have-nots.’ Many of the latter are key holders of massive undeveloped gas and liquids resources that can provide material growth opportunities or establish a strategic foothold in emerging basins. Consolidation, including a rise in corporate takeovers, will be led by national oil companies and sovereign-wealth funds, major integrated companies, global industrial conglomerates, and private-equity investors, who all seek opportunistic purchases of capital-intensive oil and gas assets and financially strained companies that own prolific resource potential.”
IHS provides comprehensive analyses of 2011 transactions and forward-looking insights into 2012 and beyond in the just-released IHS Herold 2012 Global Upstream M&A Review. This year, the study identifies thirty key regional plays across the globe that need to be on the radar of oil and gas M&A market participants, including buyers, sellers, advisors, and capital providers.
The regional profiles in each of the study sections are drawn from the IHS Herold Company Research module Regional Play Assessments (RPAs), which use IHS proprietary geological data to independently value the resource potential and investment opportunities in established and emerging oil and gas plays around the world. This research features detailed analysis of company well results, acreage positions, drilling activity, financial strength, play economics and company and asset valuations.