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Oil and Gas M&As; Reached $25 Billion in Q2 2013

PLS Inc., a Houston-based research, transaction and advisory firm, in conjunction with its international partner, Derrick Petroleum Services, announced that global M&A oil and gas upstream deal activity for Q2 2013 totaled $24.9 billion in 141 separate transactions with deal values disclosed. This is up 19% from Q1 totals of $20.9 billion in 117 deals and down 12% from Q2 2012 totals of $28.4 billion in 173 deals. After a torrid deal pace in Q4 2012 of $138 billion in 223 deals, the first-half 2013 deal value ($45.8 billion) represents the lowest six-month period since at least 2007 while the first-half 2013 deal count (258 deals) is second only to the first half of 2009 (184 deals for $65 billion). The first half of 2009 was understandably slow having come on the heels of the US financial crash spurred by the burst in the housing bubble.

According to Brian Lidsky, PLS Managing Director, "In the US, in contrast to early 2009, the economic environment is on the upswing, equity markets have been rising nicely, oil and gas prices are relatively stable and there is plenty of deal inventory. The lack of mega-deals is likely due to a conservative stance on the part of buyers, after several years of intense investment in new positions in the resource plays. Many companies have already established large acreage positions and are turning their attention and their capital to drilling the acreage. Also, there is a large deal inventory so buyers are not in a rush to strike large deals. Smaller deals are getting done at a close to normal pace."

Global E&P Mergers

Global — Q2 2013

Regionally, North America's $10.0 billion in oil and gas transactions (see Table 2) led the world with a 40% share, down from 65% in Q1. This is followed by the FSU (25%) and Africa (23%). Significant upward shifts in Q2 versus Q1 are in South America (deal value up 348% and deal count up 100%), Africa (value up 36% and count up 300%) and the FSU (value up 350% and count up 80%). Europe, on the other hand, trended lower with value down 72% while count rose 50%.

Oil and Gas M&A Deals

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According to Mangesh Hirve, Director, Derrick Petroleum Services, "Africa continues to be very active for deal activity particularly for international companies. For example, in Mozambique, beginning with the battle between Shell and Thailand's PTTEP last year for Cove Energy (whose primary asset is offshore Area 1) which PTTEP won for $1.7 billion, there have been two additional large acquisitions. In March, China's CNPC paid ENI $4.2 billion for a 20% interest in Area 4 and in June, India's ONGC and Oil India joined to pay $2.5 billion for Videocon's 10% interest in Area 1. In Area 1, first LNG exports are expected in 2018. Notably, Standard Chartered acted as financial advisors for the sellers on both large Area 1 deals. Elsewhere in Africa, Nigeria has been quite active in the last year with 8 deals totaling nearly $7 billion."

Six deals topped $1 billion globally during the quarter — three in Africa, two in Russia and one in Canada. This compares to a record 22 deals of $1 billion or greater in Q4 2012 and five in Q1 2013. For perspective, the average pace of deals greater than $1 billion since 2007 is 8.75 per quarter.

2013 Global Deals
United States — Q2 2013

In the United States, deal activity in Q2 2013 rose 18% to 71 transactions compared to 60 in Q1 2013. Deal value dropped 40% to $7.9 billion compared to Q1 2013 and the United States global share dropped 50% to 32% in Q2. Since 2007, the quarterly average deal count has been 70 deals while the quarterly average deal value has been $16.4 billion. The Q2 deal value is the lowest quarterly total since Q3 2009's $4.1 billion.

US E&P Mergers

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According to Lidsky, "In the US, no deal breached the $1 billion mark. An interesting dynamic in Q2 is that 52% of the deal value went largely to producing assets — as opposed to corporate takeovers or early-stage development projects. Also, furthering an entrenched theme of the recent markets, the two largest deals in the quarter were bought by publicly traded MLPs, reinforcing the buying strength of this sector. The other buying strength in the US, primarily Asian companies, however, did not show up in Q2. We view this as a pause, not a departure from their strong demand for North American assets.

A highlight in Q2 was the closing of Freeport McMoRan Copper & Gold's acquisitions for $19 billion of both Plains E&P and McMoRan Exploration. The deals are the largest since FCX acquired Phelps Dodge for $26 billion in 2007. FCX is now solidly positioned as a premier US-based natural resource company, being the world's largest publicly traded copper producer plus high-quality oil and gas assets with strong cash flows and re-investment opportunities.

In the MLP sector, Breitburn Energy Partners paid $890 million in an asset deal, purchased from Whiting Petroleum, representing the largest US deal in Q2. The assets, primarily located in Texas Co., Oklahoma, are largely EOR projects, nearly 100% oil, and are expected to have little to no decline in production over the next ten years. The second largest deal is Atlas Resource Partners' $733 million purchase of CBM assets from EP Energy. In contrast to Breitburn's deal, these assets are 100% gas yet also exhibit low production declines.

Regarding upstream valuations in the US, current multiples for PDP-weighted assets continue to rise. For oil assets the multiples are $120,000 per bopd or $22.50 per proved bbl (average R/P = 16 years) range. For gas, the multiples are $5,800 per Mcfpd and $1.75 per proved Mcf (average R/P = 10 years).

Looking Forward


At June 30, the inventory of deals in play continues to rise, reaching $133 billion compared to $116 billion on March 31 and $85 billion on December 31.

2013 Announced Deals in Play

The United States has the largest inventory of deals on the market with an estimated $37 billion, followed by Canada with $17 billion and Brazil and Russia, each with $15 billion.

New deals in play include Apache increasing a sales target of non-core assets to $4 billion before YE 2013 and FCX targeting $1.5 billion in sales following its recently completed acquisitions of PXP and MMR. Talisman is also reportedly investigating a potential sale of its Eagle Ford assets covering over 74,000 net acres. In Canada, Penn West Petroleum, after a CEO change, is exploring all strategic alternatives and in Africa, Shell recently announced intent to optimize its Nigerian portfolio.

PLS Inc. and Derrick Petroleum services are partners in providing U.S., Canadian and International clients leading Global and U.S. M&A and E&P databases and services. These databases now cover the upstream, midstream, downstream and OFS sectors and are maintained 24/7 by a team of analysts and are accessible via the web.

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