The big rush forecast for M&A deals in the energy sector has not happened this year. Indeed, ExxonMobil, the world’s biggest publicly listed oil and gas company, was sitting on so much cash, analysts kept their eye on it all year waiting for a move.
One finally came in October, when Exxon agreed to acquire a large stake in Ghana’s Jubilee oil field from its private equity owners, paying about $4bn to get into one of the world’s most potentially lucrative oil discoveries in recent years. But even that deal has not come to pass – it is tied up in all sorts of wrangling from others who want in on the play.
Monday’s announcement that Exxon is buying XTO Energy for $41bn, on the other hand, is the sort of deal analysts have been waiting for and sets the stage for more deals in the year ahead. Behind the scene negotiations have picked up in the fourth quarter, with a number of deals in the works.
Which of those will make it to completion is anyone’s guess. There are the usual issues around valuations. But this time around they are compounded by uncertainties about obtaining financing (yes, this is still an issue for many); where the economy is going (should they really be buying now?) and what impact carbon legislation will have on the industry (yes, some sort of legislation is coming – whether the EPA has do impose it instead of Congress).
Deloitte & Touche, the accounting firm, has put out a report on energy expectations for the year ahead that concludes the recent oil-price recovery is putting upward presure on deal-making activity among independent oil companies. Emerging signs of improving capital markets, it says, also point to the likelihood of an upturn in overall energy M&A by mid-2010, with the possiblity of a complete recovery to pre-recession levels by 2011. That would be quite a feat, considering how steep the drop was in 2008. In Deloitte’s own words:
The 2008 oil price crash and ensuing market volatility left many enegy companies in a fog of uncertainty. Wtih limited visiblity into the direction of future markets, and a worldwide contraction in investment capital, many chose – or in more dire instances, were forced – to conserve cash, cut expenses and attempt to weather the storm. M&A activity dropped precipitously, declining between 50-85 per cent from pre-recession levels, depending upon the region and the specific industry sector.
The downturn forced many, especially small independents, into what it calls survival mode. Those that made it through and have been able to free up cash are poised to move into mergers and acquitisions. Those that are still cash strapped – which it says is the vast majority – are likely to be targets.
As for Exxon, it is hard to say what else it might be planning. But the trend among the majors has been more toward selling off assets, rather than entire companies. Take the plans of ConocoPhillips and Devon Energy for the year ahead. Both plan major asset sales. The other trend has been toward buying plots of acreage, again, rather than entire companies.
Nonetheless, as pressure remains on the sector from the continued uncertainties, not everyone will be able to hang on. And since the credit markets, economy and carbon legislation will remain a looming question at least into the start of the year, the pressure for deal making is only going to build.
Even the majors are being conservative. While Exxon has pledged to keep its spending steady, Chevron set a $21.6bn spending program for 2010, down 5 per cent from 2009. ConocoPhillips approved a 2010 capital program of $11.2bn, down 10 per cent from 2009.
Yet Antonia Bullard, senior director at PFC Energy, the consultancy, said prices for oil field services and equipment have fallen about 20 per cent in the past year, so these “smaller” budgets are buying at least as much or more exploration, development and production as the larger budgets of 2008 and 2009.
Nonetheless, some smaller companies are cutting back significantly, underlining uncertainties in accessible credit, the economy and carbon legislation. PFC Energy projects that it will take until 2013 for global exploration and production capital spending to return to the 2008 peak figure of nearly $460bn, and the possibility of a double-dip recession could postpone this still further.
Against this backdrop, Charles Swanson, Houston office managing partner at Ernst & Young, the professional services firm, said companies that spread themselves too thin during the good times are now specialising.
“Everybody needs to be focusing on what they do best,” Mr Swanson said. “It plants the seeds for the ultimately better times.”
Oil M&A and the penguin problem (FT Energy Source, 17/04/09)
A tale of two oil companies’ investment strategies (FT Energy Source, 06/04/09)
A cautious sign for oil and gas deals (FT Energy Source, 19/03/09)