Record cash flows and many players fuel oil and gas M&A activity

Record cash flows have pushed deal activity in the oil and gas industry to levels rivalling the mega merger highs of 1998.

‘O&G Deals’ — the first annual analysis by PricewaterhouseCoopers (PwC) of M&A activity in the oil and gas sector —reports that average deal value in the sector rose 18% in 2006 pushing the aggregate M&A total to US$291bn, up US$41bn some 16% on the previous year.

Gas deals dominated the list of the largest transactions in 2006, with six out of the eight upstream deals in the top ten deal list. This was in contrast to the previous year when only two deals in the top ten of all deals and four of the top 10 of upstream deals were gas dominated.

The total value of oil and gas deal activity in North America leapt by 40%, from US$118bn in 2005 to US$164.7 billion in 2006. The total number of deals remained the same but the number of large deals, worth US$1 billion or above, increased from 21 to 32. Two of the top 10 deals in 2006 were Canadian-based companies-Canadian Natural Resources acquisition of the acquisition of Anadarko Canada Corporation valued at US$4.075 billion, followed by TransCanada Corps’ acquisition of ANR Pipeline Company and ANR Storage Company and interest in Great Lakes Gas Transmission Limited Partnership from El Paso Corporation valued at US$3.844 billion.

“With companies facing growing competition on the international scene, 2006 saw renewed interest in what has up to now been more marginal oil and gas reserves, in particular the Canadian oil sands,” says Tim Nakaska, a partner in PwC’s energy practice. “Rather than sink additional money into high-growth, but politically risky, areas, some oil majors are directing more attention to U.S. small-majors and the Canadian oil sands, where reserves can be acquired with less risk, but at a higher price.”

Unlike in the past, it is not the majors that are fuelling much of the deal momentum. Instead, the PwC survey found four key drivers of deal activity:

• accelerated consolidation among mid-size companies;
• the ascendancy of the national oil companies;
• a boom in oil services activity;and
• the appetite of private equity.

The rise of private equity players and consolidation at the top of the midsize energy market characterized the table-topping deals of 2006. Kinder Morgan’s management and private equity buy-out and Statoil’s purchase of Norsk Hydro’s oil and gas division each provided US$32 billion in evidence of these two deal forces at work.

“In the period ahead, we are likely to see continued momentum in oil and gas deal activity,” says Clinton Roberts, also a partner with PwC’s energy practice. “The pressure to replace reserves and the structural rationale for consolidation will remain in place. It is clear that consolidation has a long way to run in the independent and mid-size sector of the market, particularly in North America. In Europe, the many independent oil and gas companies listed on the UK’s AIM are a likely source and target of M&A activity.”