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Energy Deals Sizzle in '08, but Values Fizzle by Year End

Last year's global natural gas and oil transactions hit a record, but the late-year financial crisis and falling economic conditions resulted in a considerable reduction in the total value of transactions by year's end, PricewaterhouseCoopers LLP (PwC) reported last week.

The number of transactions rose to a record 969 last year, which was 8.5% higher than in 2007. By the final quarter of 2008, however, total transaction value had fallen 59% from the previous year, PwC said.

Only North America and the Russian Federation experienced a decline in the volume of transactions, the report noted.

"The fall in North America O&G [oil and gas] deal volume from its 2006 $164.7 billion high accelerated sharply in 2008," PwC said. "Total deal value fell 43%, from $129.7 billion in 2007 to $73.6 billion in 2008. Deal numbers were down by 8% but it was a halving of the number of big transactions that really hit total value. There were just 15 deals in 2008 worth $1 billion or above, for example, compared to 31 in 2007. This alone accounted for $49.4 billion of the total $56 billion year-on-year fall in total deal value."

Two producers -- Chesapeake Energy Corp. and XTO Energy Corp. -- accounted for $22.4 billion of the total $59.6 billion in upstream deals last year, PwC noted.

"The difference was that while XTO was on the acquisition trail with nine purchases in 2008 totaling $10.6 billion, Chesapeake was a seller as it responded to a closing of the debt markets...The contrasting deal context was matched by their timing. Six of the nine XTO purchases were made in the first half of the year as the oil price remained buoyant while all but two of Chesapeake's sales came in the second half of the year as the financial market deterioration intensified and commodity prices collapsed."

Even before the global economy hit the skids last year, "big deals were already retreating, especially in the oilfield sector," said PwC's Rick Roberge, U.S. energy transaction services partner.

Total global deal value in 2008 fell 38% to $180.4 billion, down from the 2007 high of $292.2 billion, said the report. Only two transactions topped the $5 billion mark in 2008, compared with 10 in 2007.

Natural gas claimed six of the top 10 transactions, and five of the six were for unconventional resources. All of the gas transactions were in North America and Australia, "reflecting the attraction of targets in stable locations close to end markets as companies responded to security of supply constraints," PwC noted.

Constrained debt markets, depressed equity prices and commodity prices likely will stall significant acquisitions or merger activity in the early part of 2009, the report noted. However, "it is difficult to see stronger players remaining on the sidelines for the whole of 2009 given the opportunities for acquisitions at low valuations. An opening of the equity markets will be followed by the debt markets which will allow financing to become available," it said.

"While we believe the first half of 2009 will be subdued, any easing of the debt and equity markets combined with some positive movement in the price of oil is likely to herald a reawakening of deal activity in 2009," said Roberge. "When the market returns, and the financial crisis has passed, the potential for a fast revival in commodity prices and deal-making is there."

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