Oil and gas M&A undeterred

The appetite for mergers and acquisitions in the global oil & gas industry remained robust in 2007, despite the credit crunch sparked by the US sub-prime mortgage lending debacle.

Indeed, service sector deals rocketed, though oil company merger activity was more muted.

The latest PricewaterhouseCoopers, O&G Deals survey shows that, at $292.2billion, the value of deals transacted in 2007 was marginally up on the prior year’s $291.1billion total.

PWC says that, far from being hit by the credit crunch, 2007 ended with a flourish, but that deal dynamics are changing as the need for service companies to scale up globally in a consolidating market bites. The total value of deals in services (upstream and downstream) jumped 165%, from $25.4billion to $67.3billion. According to PWC, services deals are now a key “motor” of M&A activity in the wider oil&gas industry, accounting for nearly a quarter (23%) of the value of all deals, compared with just 4% in 2005.

The big increase in deal values in the oil services sector was led by the $17.4billion merger of Transocean and Global SantaFe. PWC says the move highlights the momentum towards consolidation in the sector as companies strive to gain greater scale in response to rising demand.

This momentum gathered further pace in December, 2007, with the $6.6billion purchase of Grant Prideco by National Oilwell Varco resulting in a combined group with a market capitalisation around $32billion.

Earlier in the year, Sweden’s Ssab Svenskt Stal moved for Canada’s IPSCO in a $7.4billion move that brings together two specialists in steel products for the oil&gas industry.

Much of the huge increase in downstream deals value was accounted for by the largest transaction of 2007 – Dutch chemicals group Basell’s leveraged $20billion buyout of Lyondell.

PWC reckons the trend of consolidation in the sector looks set to continue in 2008.

Notable by their absence are big international oil company (IOC) deals as a reserves building and costs reduction ploy. Thwarting them is the growing dominance of national oil companies (NOCs), though they, too, appeared lower key than in 2006.

“There was a lull in activity that in previous years had seen Russian, Chinese and Indian NOCs becoming major competitors for assets outside their home territory,” says PWC.

Its research points to highly leveraged deals becoming more difficult in the sector as the credit crunch takes effect. However, while the wider financial and economic environment will be less predictable, the report points to a range of factors that will continue to drive deal activity:

Corporate players will be mindful of the pressure to replace reserves and the structural rationale for consolidation.

NOCs will continue to use their strength to look for international investment opportunities.

Middle Eastern investors will remain active deal-makers.

Supply constraints, geopolitical considerations and climate-change concerns will necessitate continual re-evaluation of asset portfolios.

International deals involving either international groups of investors or assets that are spread across territories were up across the board in 2007, with the exception of upstream.

Total value rose 269%, from $20.5billion in 2006 to $75.8billion in 2007. The number of transactions jumped 42%, from 50 to 71, and average value was up 160%, from $400 million to $1.1billion.

International deals took four of the top 10 deals in 2007, with bids for Lyondell, GlobalSantaFe, Huntsman and IPSCO totalling $54.4billion. In the 2006 top 10, in contrast, there was just one international deal, worth $5.3billion.