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Despite Crude Oil Price Decline, Global Upstream M&A Transaction Value Rose in 2014, IHS Says

Overall deal count plummeted during final two months of 2014 despite solid activity beforehand; Repsol’s announced takeover of Talisman may signal further consolidation

Despite a late-year plunge in crude oil prices, robust merger and acquisition activity (M&A) in the first 10 months of the year fueled an increase in the total transaction value for global upstream oil and gas M&A deals in 2014, which rose 23 percent to $173 billion, according to analysis from information and insight provider IHS IHS, -0.28%

This rebound in 2014 transaction value is particularly noteworthy for the industry after transaction value for global upstream oil and gas M&A deals fell by almost half during 2013 to $140 billion, the lowest level since the 2008 recession. In 2013, rather than shopping for deals, oil and gas companies shifted their focus to developing their vast inventories of previously acquired reserves, resources and acreage.

“The uncertainty caused by the severe decline in oil prices during the final two months of 2014 nearly brought deal activity to a standstill,” said Christopher Sheehan, director of energy M&A research at IHS. “Buyers and sellers are having difficulty reaching a consensus because of the oil price tumble, which is causing significant uncertainty for the industry. However, transformative acquisition opportunities typically arise at the bottom of the crude price cycle, so Repsol’s late-year agreement to acquire Talisman Energy may be the tip of the iceberg for corporate consolidation if crude prices remain depressed throughout 2015. The deal may foreshadow further consolidation in the oil and gas industry.”

Another significant change in 2014 upstream M&A activity was a plunge in acquisitions by Asian and Caspian regional national oil companies (NOCs). Asian and Caspian regional NOCs were buyers in half of the 10 largest deals in 2013, but none of these companies were buyers in the 10 largest deals in 2014. Seven of the 10 largest worldwide deals involved North American-based E&Ps as either buyer or seller in transactions that each exceeded $2 billion.

The value of overseas acquisitions by Chinese NOCs fell steeply in 2014 to less than $3 billion from $20 billion in 2013. However, private Chinese financial and industrial conglomerates emerged as more active buyers in the global M&A market. And the Chinese NOCs reached large, forward-sale oil and gas supply agreements worth tens of billions of dollars with Russia, highlighting the strengthening of ties between Asian NOCs and Russia as sanctions reduce western investment. Western integrated oil companies, such as Royal Dutch Shell, which divested approximately $15 billion in worldwide upstream assets in 2014, were among the most active global market sellers during the year. Meanwhile, Middle Eastern NOCs increased their overseas acquisition spending.

According to IHS energy M&A research, worldwide deal count (which includes both asset deals and corporate deals) rose 4 percent in 2014, but remained well below the 10-year high in 2012. The number of worldwide asset transactions climbed by 4 percent in 2014, reversing the almost 10 percent decline in the prior year, noted IHS.

The corporate deal count rose only marginally from the 10-year low in 2013. Large-scale corporate consolidation was relatively absent for the second consecutive year, with only three corporate transactions above $5 billion in 2014, including Repsol’s $15.5 billion takeover agreement for Talisman. Global spending on unconventional assets in 2014 increased substantially to more than $70 billion, after plunging by nearly 50 percent in 2013 to approximately $45 billion. However, this total was almost 20 percent below the peak of $85 billion in 2012.

The United States represented nearly 50 percent of global upstream oil and gas transaction value in 2014. Four of the top-five largest U.S. deals targeted unconventional resources, led by Encana’s $7.8 billion acquisition of Midland Basin private producer, Athlon Energy. Total U.S. transaction value rose strongly from the five-year low in 2013, with corporate deal value nearly quadrupling from a 10-year low, while asset deal value increased by one-third.

For the second consecutive year, the majority of U.S. deal value was from transactions in the Mid-Continent (29 percent), onshore Gulf Coast (16 percent), and Rocky Mountain (22 percent) regions. Deal activity continued to be modest in the Gulf Mexico, with its U.S. market share falling to 7 percent in 2014, from 12 percent in 2013. The percentage of U.S. deal value represented by Appalachia, predominantly in the Marcellus and Utica shales, more than doubled year-over-year, to 16 percent. Only three of the 10 largest U.S. deals targeted conventional resources.

IHS found that North America accounted for approximately 60 percent of global upstream deal value in 2014, up from 42 percent in 2013. Canada’s market share climbed from 7 percent to 13 percent, highlighted by Talisman’s portion of Canadian assets and Devon Energy’s $2.85 billion sale of conventional, gas-weighted reserves to Canadian Natural Resources.

Said Sheehan, "Bargain hunters taking advantage of low implied values for North American gas asset-divestment packages drove a significant increase in the natural gas weighting of acquired North American proved (1P) reserves in 2014, following a 10-year low in 2013. Deals outside North America for proved plus probable (2P) reserves were more than 60 percent oil and liquids for the third consecutive year.”

Transactions outside North America dominated the top-20 largest global deals in 2013, but accounted for slightly less than half of the top 20 in 2014. The Russia and Caspian regions, impacted considerably by western sanctions, represented only 5 percent of global market share in 2014, after comprising approximately 25 percent the prior year. The percentage of global deal value more than doubled in the Asia-Pacific region, while it held steady in Europe and South and Central America, but declined sharply in the Africa and Middle East regions due to heightened political instability.

“Our IHS analysis of upstream companies indicates debt-laden oil and gas companies that are not well-hedged could increasingly become takeover targets in 2015,” Sheehan said. “The volume of global assets for sale could surge if oil prices continue to remain depressed during the first half of the year. Our new IHS Significant Energy Assets on the Market (SEAM) database, which is available on IHS Connect, is already tracking more than $150 billion of oil and gas property and corporate opportunities and those opportunities are likely to expand.”

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