M&A activity on the upswing

Don Stowers,Editor, OGFJ

ExxonMobil's $40.4 billion acquisition of Fort Worth-based XTO Energy topped the list of North American energy deals in 2009. Announced on Dec. 14, the transaction came with only two weeks to go in the calendar year.

JPMorgan was the bidder's financial advisor, and Barclays Capital and Jefferies & Company advised the seller.

As large as this transaction is, it was only the fifth largest among North American M&A deals in 2009. Pharmaceutical giant Pfizer's acquisition of Wyeth for $63.3 billion was the blockbuster deal of the year, and two of the top four deals involved pharmaceutical makers. Berkshire Hathaway's $35.6 billion purchase of additional shares in Burlington Northern Santa Fe Corp. was sixth largest, followed by the US Treasury Department's acquisition of a 33.6% stake in Citigroup Inc. for $25 billion.

The only other energy transaction among the top 10 deals in North America was Suncor Energy's acquisition of Petro-Canada for $18.4 billion. Suncor was advised by CIBC World Markets and Morgan Stanley, and Deutsche Bank and RBC Capital Markets advised the seller.

This year's ranking of top global M&A advisory firms is not specific to the upstream energy industry because that information was not available at press time. As a result, some of the active energy M&A advisors such as Scotia Waterous (No. 1 in the 2008 rankings, according to number of transactions, and No. 2 in deal value) and CIBC, both of which are among the leaders in upstream transactions, were not included in the 2009 rankings.

This year, Morgan Stanley overtook Goldman Sachs in the Mergermarket rankings for the first time in recent years. JPMorgan, which advised ExxonMobil on the XTO Energy deal, took third place in the standings. Citigroup and Bank of America Merrill Lynch, respectively, took the No. 4 and No. 5 positions among the largest M&A advisory companies.

After the financial meltdown of 2008, last year has been a challenge for many companies in the oil and gas sector, but there have been substantial opportunities for companies with strong balance sheets. The OGJ150 Quarterly Report for the fourth quarter of 2009 indicates that, as a group, the largest 20 publicly-traded US producers did substantially better financially than their smaller counterparts. These 20 companies had 96.5% of the total revenue for the 122 companies covered in the OGJ150 report. The top 20 earned $16.3 billion in net income, while the remaining 122 had a net loss of $368 million, as a group.

Some of the smaller companies did better than others. Brigham Exploration, for instance, which is concentrating its efforts in the oil-rich Bakken shale play in North Dakota and Montana, saw a 418.9% increase in net income and a 187.7% rise in shareholder equity over the last quarter in 2009.

Outlook positive for 2010

Ernst & Young believes the outlook for 2010 is "looking positive." A total of 837 oil and gas deals globally were announced in 2009 compared to 1,152 in 2008, with upstream deals accounting for 72% of these. Interestingly, the total value of oil and gas transactions in 2009 was $198 billion, a 10% increase over 2008, perhaps surprising given the lower average commodity prices in 2009.

M&A activity in the second half of 2009 was much stronger than the first half with 485 deals compared to 352, an increase of 38% in the final six months. The total value in the second half of 2009 was $109 billion compared to $89 billion in the first half of the year. Doubtless this reflects the improving capital market conditions and growing consensus on oil price outlook.

Andy Brogan, global oil and gas transaction advisory leader at Ernst & Young, noted, "The positive trends that we have seen in recent months are likely to continue…and the outlook for oil and gas transactions is healthy in upstream and oilfield services. In the downstream sector, over-capacity in some regions is likely to drive a longer period of uncertainty and transactional challenges. But, as 2009 demonstrated, one person's challenge represents another's opportunity."

Return to pre-recession levels

Deloitte's Energy and Resources group says M&A activity in these sectors could reach pre-recession levels by 2011.

In its "Energy Predictions 2010" report, Deloitte said, "Apart from the supermajors, consolidation will be likely across sectors. Oil and gas independents will be possible targets for reserve-hungry majors, but also potential beneficiaries of portfolio rationalization among larger players."

Adam Waterous, vice-chairman and head of global investment banking for Scotia Capital, believes oil and gas companies will increase acquisitions in 2010, especially in Asia, noting that a substantial portion of the company's "deal pipeline" involves Asian entities.