IHS Herold: Global upstream M&A posts first rise in two years

After two consecutive years of decline, global upstream M&A transaction value increased 40% in 2009 to just less than $150 billion, according to the annual Global Upstream M&A Review issued by energy research firm IHS Herold of Norwalk, Conn. North American deals accounted for a record high two-thirds of the overall value.

Driving the increase were two of the largest corporate takeovers since 2006: ExxonMobil’s $41-billion acquisition of XTO Energy Inc. and Suncor Energy Inc.’s $21-billion merger with Petro-Canada. Transactions by national oil companies (NOCs) and international oil companies (IOCs) jockeying for vast resources in Africa and other international spots also propelled deal value.

North American transactions represented 65% of the global total, up from 50% in 2008. Of the 10 largest 2009 deals, six were North American reserve acquisitions, as buyers sought access to massive volumes of long-lived unconventional gas and oil-sands resources in politically stable areas with minimal exploratory risk.

The number of deals outside North America increased for the third consecutive year to an all-time high, as companies attempted to build oil reserves by accessing world-class discoveries and acquiring small companies exploring in frontier regions.

IHS Herold M&A research director Chris Sheehan says, “Spending on unconventional resources in North America topped $50 billion in 2009, including U.S. onshore shale plays and the Canadian oil sands. National oil companies spent record sums on oil-based deals outside of North America, including more than $15 billion by Chinese state-owned entities.

“Africa fueled international M&A deal growth last year, as the region represented nearly 10% of global deal value and more than 25% of transaction value outside North America in 2009, both record highs.”

Corporate acquisitions comprised 70% of worldwide deal value and accounted for the five largest transactions, although total corporate deal count held flat at near a five-year low. North American corporate transaction value quadrupled over the prior year.

Unconventional resources, including shale gas and oil sands, were the focus of the two largest deals and four of the top 10 transaction involving North American assets. NOCs were buyers in four of the 10 largest deals, led by Asian NOCs expanding global upstream holdings in Africa, Canada and the former Soviet Union.

In 2009, acquired proved reserves (90% chance of recovery) were approximately 60% oil (nearly 80% oil excluding the ExxonMobil/XTO transaction), while proved plus probable reserves (50% chance of recovery) transacted volumes were more than 50% oil. Outside North America, acquired proved reserves were more than 95% oil, significantly higher than historical norms of around 70%. Gas accounted for 65% of acquired North American proven reserves, in line with the five-year average.

IHS Herold expects relatively robust crude prices and a continued thawing of the credit markets to positively affect global deal activity in 2010, with more than $20 billion in assets on the market and a pool of well-capitalized international buyers seeking to secure supply and grow reserves.

Sheehan says, “Despite current soft gas prices, the massive volumes of long-lived North American unconventional-gas resources with minimal exploratory risk are extremely enticing for IOCs that seek to replace declining production from mature, conventional basins.

“Internationally, we believe strategically driven Asian NOCs will continue their quest to secure global energy supply through the M&A market, with IOCs and independents battling for the same world-class assets.”

Major oil companies and European IOCs invested heavily in U.S. onshore shale gas through both asset and corporate acquisitions in 2009, lifting the percentage of global spending for the U.S. to more than 40% of worldwide transaction value.

The U.S. deal count tumbled to a 10-year-low, primarily due to weak gas prices and tight equity and credit markets for the small and midsize E&Ps that traditionally fuel market liquidity.