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North American M&A Activity Surges in 3Q2009

October 5, 2009
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A drop in U.S. natural gas prices in late August contributed to a surge in global merger and acquisition (M&A) activity in 3Q2009, resulting in 112 transactions worth almost $21 billion, according to an analysis by Houston-based PLS Inc. and Derrick Petroleum Services. North American transactions led all others.

"Oil and gas deal volume increased markedly beginning in late August 2009 due to a confluence of events," said Brian Lidsky, PLS managing director of research. A "growing consensus that the economy bottomed" in 2Q2009, oil price stability and a "dramatic drop of U.S. natural gas prices in late August/early September toward the $2.50 range...signaled a buying opportunity to the U.S. markets."

According to the analysis, Canada led all others, transacting 35 deals worth $6.9 billion. Canada also had two of the largest transactions in the quarter:

"The Canadian markets caught fire in late August due to valuations and a reemergence of the mid-tier E&P [exploration and production] sector, which had been taken out by acquisitions earlier in the decade due to favorable tax treatment of the royalty trusts," Lidsky said. "When the rules changed overnight and with the January 1, 2011 deadline removing this favorable treatment rapidly approaching, companies are strategically positioning themselves to succeed under these new rules.

"Royalty trusts, once acquirers and distributors of cash flow, now are focused on traditional E&P company strategies -- growth in underlying asset values via profitable exploration and drilling and growth. Also propelling the Canadian markets is the stability of the oil price and the continued interest and investment of the international companies in Canada's world class oilsands and emerging shale plays."

Globally, the United States ranked as the second most active for M&A, with 45 separate transactions worth an estimated $4.4 billion. Africa scored seven deals worth about $2.4 billion, edging out Europe,which inked six deals for $2.3 billion. Australia accounted for six deals for $827 million. South America deal activity lagged the world with only two deals worth around $187 million.

U.S. deal activity continued to rebound from the "virtual standstill" experienced in the first three months of 2009, PLS said. The pace, however, still lagged that of 3Q2008, when 66 transactions worth an estimated $14.3 billion were signed.

"Deal activity in the U.S. has heightened considerably with private buyers stepping up to the plate," said Lidsky. "Regarding conventional plays, investor interest is high in oil-producing assets as noted by the surge of activity in the Permian basin of Texas and New Mexico. Unconventional shale gas plays are also very active with Canadian and European investors partnering with solid U.S. operators to leverage operating expertise in these highly technical plays."

In terms of valuations in the United States, the analysis estimated that in 3Q2009 oil and gas proved reserves changed hands at $9.83/boe and $70,986/flowing daily boe.

The largest domestic conventional deals in 3Q2009 were all corporate takeovers -- and all by private firms, noted PLS. Hicks Acquisition Co.'s $582 million purchase of Resolute Natural Resources Co. was the largest deal in the quarter (see NGI, Aug. 10). Hicks, headed by Tom Hicks, raised capital as a special purpose acquisition company and plans to use the transaction to take the Rockies-focused company public.

In another private company transaction, Apollo Management VII LP bought publicly traded Parallel Petroleum Corp. for $495 million. Parallel had been struggling for months (see NGI, Feb. 23). Apollo's move came on the heels of its unsuccessful effort earlier this year to acquire another Permian basin player, Legacy Reserves LP.

"In terms of the forward looking markets, the inventory of deals available remains high," the analysis noted. PLS, which is based in Houston, said it has data for 172 offerings from oil and gas brokers and an additional 1,100 investment opportunities for drilling ventures, producing properties, overrides and leasing in its listing database. Derrick Petroleum has cataloged 179 deals available internationally.

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