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Upstream M&A Surge in Late 2009 Seen on Course to Continue

Upstream mergers and acquisitions (M&A) staged a strong recovery by the end of 2009 and a "healthy" transaction level is on course to continue through 2010, according to a new review by energy consultant Wood Mackenzie.

Monthly deal activity climbed from record lows in the first three months of 2009 to near-record levels by year's end, according to the upstream review by the UK-based consultant. The rebound was enough that global M&A spending in 2009 recovered to top $150 billion, which was 35% higher than in 2008 and only 15% below the record investment levels of 2006.

"The rebound in deal activity gained strong momentum through the second quarter," said M&A Service Manager Luke Parker. "Once the wider economy began to show signs of stabilizing, the key to the recovery in upstream M&A was a realignment in the price expectations of buyers and sellers."

For market participants, the perceived value in upstream M&A held steady in 2009, the review found. The implied long-term oil price, which is Wood Mackenzie's estimate of the long-term Brent price that a buying company would require to generate a 10% return on its investment, averaged US$66/bbl for the year, which was broadly in line with 2008.

"Once the oil price hit the US$70/bbl mark, it was back in alignment with market valuations and industry consensus planning assumptions for the first time since late 2007," Parker noted. "It was this convergence that served to ease the disconnect between the price expectations of buyers and sellers, and to facilitate the rebound in deal activity witnessed during the second half of the year."

2010 should see a buoyant market, said Parker.

"The ramp-up in the level and intensity of M&A activity witnessed during the second half of 2009 was a return to mean. Provided that tentative global economic recovery remains on track and commodity prices are relatively stable, the market is likely to hold at its current level through 2010."

Large-scale corporate consolidation is unlikely, according to Wood Mackenzie's outlook.

"For the majors at least, the drivers for such moves are not nearly as strong as they were in the late 1990s," said Parker. "We would, however, expect to see a pick-up in the level of smaller scale, strategic acquisition and divestment (A&D) activity among this peer group over the next few years.

"We also maintain the view that the expansive national oil companies (NOC) have the financial muscle and strategic imperative to significantly increase the scope and intensity of their M&A activity," he said.

Several key trends were identified by Wood Mackenzie. First, overseas investment by the NOCs doubled year-on-year to reach more than $26 billion in 2009, equivalent to a record 17% of global M&A spending and 44% of M&A spending outside of North America. Second, the Asian NOCs were "particularly active, abandoning the cautious strategy that had characterized the previous two years in favor of a renewed interest in deal-making."

In addition, "unconventional resources remained an important theme in M&A, with the largest upstream deal in nearly a decade -- ExxonMobil's $41 billion acquisition of XTO Energy Corp. -- pushing total investment in the sector to a record 45% of global M&A spend" (see NGI, Dec. 21, 2009). The second-biggest merger in North America in 2009 was Suncor Energy Inc.'s $15.5 billion buy-out of Petro-Canada, which created the largest energy company in Canada (see NGI, March 30, 2009).

A drop in U.S. natural gas prices in late August contributed to a surge in global M&A in 3Q2009, which resulted in 112 transactions worth almost $21 billion, according to a separate analysis by Houston-based PLS Inc. and Derrick Petroleum Services (see NGI, Oct. 5, 2009). North American transactions, it said, led all others.

"The market was underpinned by corporate deals in 2009," Wood Mackenzie's Parker noted. "Our findings show that of the 11 $2 billion-plus transactions announced during the year, nine were corporate deals. Furthermore, these nine deals accounted for nearly 60% of total M&A spend. The market for assets, by contrast, was at its lowest level since 2005, in terms of both deal count and total spend."

Total resources traded during 2009 was more than 77 billion boe, which was 49% liquids and 51% natural gas, "which, for context, compared to annual oil and gas production of approximately 48 billion boe (64% liquids and 36% gas)," the review said.

For more information visit www.woodmac.com.

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