Key 2010 trends in oil and gas deals

Oil and gas deals in the exploration and production (E&P) sector reached US$73 billion in the last quarter of 2010 with deals for the year totaling US$238 billion, compared with US$151 billion in 2009. The total deal value in Q4 2010 is second only to Q3 2010 in recent years, even outscoring Q4 2009 -­ a quarter that included ExxonMobil’s US$41-billion acquisition of XTO Energy. That’s according to an analysis of Evaluate Energy’s in-depth mergers and acquisitions (M&A) database.  
At least four key trends emerge from the pattern of oil and gas deals in 2010.

• A marked shift in Chinese activity away from Africa towards the Americas.
• A growing interest in shale plays containing liquids and some interesting new innovative approaches to monetizing shale resources, prompted by the widening gap between gas and oil prices.
• A trend towards taking companies private.
• The nearing completion of a dramatic series of divestitures by BP.

China shifts focus
Following a quarter of inactivity in Q3 2010, Chinese state companies satisfied their appetite for foreign assets with a flurry of deals in Q4 2010, ending the year with a total of US$31 billion in E&P acquisitions. This compares with a total of US$19 billion spent by Chinese companies on E&P assets in 2009.
In this time, the Chinese government has been agnostic towards the location of their acquisitions, with major deals being conducted across 14 different countries. Whilst Africa was the main focus of acquisitions in 2009, Canada and South America dominated China’s deals in 2010, accounting for eight of the top 10 deals by Chinese companies during the year.
Amongst the key drivers of deal value during the fourth quarter was the spending by Chinese companies in Latin America. The largest deal of the quarter came from Sinopec acquiring a 40% stake in Repsol Brazil for US$7.1 billion and gaining a foothold in the increasingly popular Brazilian offshore pre-salt reserves. This sector is about to undergo major development with the huge US$43-billion deal by Petrobras and consequent financing paving the way for a development charge.
The second largest deal of the quarter came from the acquisition by Bridas Corp (50% owned by CNOOC) of BP’s 60% stake in Pan American Energy, the second largest oil and gas producer in Argentina for US$7 billion. Sinopec added further to China’s Argentine assets by acquiring Occidental’s Argentine operations for US$2.5 billion. The final major deal by a Chinese company came from CNOOC farming into a 33% stake in Chesapeake’s liquids rich Eagle Ford shale assets. The deal marks the first major Chinese acquisition in the U.S. since CNOOC’s failed attempt to acquire Unocal in 2005.
In the effort to secure energy supplies to China’s booming economy the government has also entered into various loans for oil agreements. This strategy capitalized on the disparity of economic performance between China and the majority of the rest of the world, without the risk of potential hostility from another Chinese asset grab. Agreements are now in place with Brazil, Russia, Kazakhstan, Ecuador and Venezuela, with the latter receiving a loan of US$20 billion.
Shale focus switches to liquids
Whilst shale gas emerged as a key driver of U.S. M&A in early 2010, shale oil has now started to take a more prominent position amongst the shale-focused deals, with the Eagle Ford shale play in particular attracting a lot of interest during the last quarter of 2010.
There were 10 deals during that quarter involving the liquids rich portion of the Eagle Ford shale play, with a total value of US$4.5 billion. The switch from gas-bearing shale to liquids-rich shale is due to the large difference in realizations from oil and gas in the U.S.
Talisman has taken another route to attracting increased realizations from one of their shale properties. Talisman accepted a US$1-billion farm-in from the South African integrated company Sasol in their Montney shale play in Canada. The key reason why Sasol was taken on as a partner is due to the company being amongst the global leaders in gas-to-liquids technology. The companies will be conducting a feasibility study for the construction of a gas-to-liquids plant and the case for the construction will gain strength should the gas prices remain low relative to liquids realizations.
Shale gas deals still took the majority of the value amongst shale deals in that quarter, however, with US$7.4 billion worth of deals. The value was considerably boosted by the US$4.3-billion acquisition by Chevron of Atlas Energy, a company with holdings in the Marcellus and Utica shale plays.
BP’s divestiture plan
BP continued their asset divestiture program with US$10 billion of asset sales in various countries during Q4 2010. The most significant sales by BP includes the US$7-billion sale of the company’s 60% stake in Pan American Energy to Bridas Corp, the US$1.8-billion sale of the company’s Venezuelan and Vietnamese assets to TNK-BP, the US$775-million sale of the company’s Pakistan assets to United Energy Group and the US$650-million sale of certain Gulf of Mexico assets to Marubeni.
Since BP’s Macondo oil spill in April 2010 which prompted a US$30-billion provision to be made by the company, US$21 billion worth of divestitures have now been conducted by BP.  In July, BP reported that they are aiming for US$30 billion of asset sales, which coupled with the company’s dividend freeze is aimed at fully satisfying the oil spill costs.
Lure of going private
As North American gas prices continued to remain suppressed hovering around US$4 per thousand cubic feet (mcf) for much of Q4 2010, EXCO’s CEO Douglas Miller launched a bid to capitalize on the company’s relatively low valuation by launching a $5-billion bid to take EXCO private. The offer stands at a 38% premium to the day prior share price and at US$5.30 per proved mcf of gas equivalent the offer represented a 60% premium to the day prior Henry Hub benchmark price. Fellow U.S. gas producer Quicksilver Resources also received an approach during the quarter from an investor group which includes the current CEO Glenn Darden to become private although an official offer has yet to be made. While gas prices in the U.S. remain low, the owners of EXCO and Quicksilver will find it easier to cut back their capital spending and production away from the scrutiny of public shareholders until trading conditions improve.
– The author is an energy analyst at Calgary-based Evaluate Energy
(www.evaluateenergy.com).