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U.S., Canadian Onshore a Magnet for Money

Majors and European-based international oil companies (IOC) invested heavily in U.S. onshore shale natural gas through both asset and corporate mergers and acquisitions (M&A) in 2009, lifting the percentage of global spending for the United States to more than 40% of worldwide transaction value, according to energy research firm IHS Herold.

The annual Global Upstream M&A Review reported that upstream M&A transaction value, which had declined for two consecutive years, increased 40% in 2009 to just under $150 billion. Deals in North America accounted for a record high two-thirds of the total.

"Spending on unconventional resources in North America topped $50 billion in 2009, including U.S. onshore shale plays and the Canadian oilsands," said IHS Herold's Chris Sheehan, who directs M&A Research.

North American transactions last year were up from 50% of the total in 2008, IHS Herold researchers found. Six of the 10 largest deals in 2009 were North American reserve acquisitions "as buyers sought access to massive volumes of long-lived North American unconventional gas and oilsands resources in politically stable areas with minimal exploratory risk."

The U.S. deal count actually tumbled to a 10-year low, primarily because of weak gas prices and tight equity. Also weighing on U.S. transactions were the credit markets for small and mid-size exploration and production companies, which traditionally fuel market liquidity.

The dramatic increase in value was propelled by the two largest corporate takeovers since 2006: ExxonMobil Corp.'s $41 billion acquisition of XTO Energy Inc. (see NGI, Dec. 21, 2009) and Suncor Energy Inc.'s estimated $21 billion merger with Petro-Canada (see NGI, March 30, 2009). In Canada deal activity was sluggish for the second year in a row, with the Suncor/Petro-Canada merger worth more than half of 2009 transaction value.

Outside North America, the number of deals increased for the third consecutive year to an all-time high as companies sought to build oil reserves by accessing world-class discoveries and acquiring small companies exploring in frontier regions.

A rash of deals by national oil companies (NOC) and IOCs jockeying over vast resources in Africa and other international regions also drove the increase. Asian NOCs were buyers in two of the largest deals. Implied reserve values for oil-weighted transactions and the percentage of transacted crude reserves increased, while pricing for gas-weighted assets fell sharply.

"National oil companies spent record sums on oil-based deals outside North America, including more than $15 billion by Chinese state-owned entities," Sheehan said. "Africa fueled international M&A deal growth last year as the region represented nearly 10% of global deal value and more than 25% of transaction value outside North America in 2009, both record highs."

Corporate acquisitions comprised 70% of worldwide deal value in 2009 and accounted for the five largest transactions, although total corporate deal count held flat near a five-year low, the researcher found. North American corporate transaction value in 2009 quadrupled over the prior year.

Unconventional resources, including shale gas and oilsands, were the focus of the two largest deals and four of the top 10 in North America. NOCs were buyers in four of the 10 largest deals, led by Asian NOCs expanding global upstream holdings in Africa, Canada and the former Soviet Union.

In 2009 acquired proved reserves (90% chance of recovery) were split 60% oil (nearly 80% oil excluding the ExxonMobil/XTO transaction) while proved plus probable reserves (50% chance of recovery) transacted volumes were more than half oil. Outside North America, acquired proved reserves were more than 95% oil, significantly higher than the historical norm of around 70%.

Natural gas accounted for 65% of acquired North American proven reserves, in line with the five-year average.

The relatively robust crude prices and a "continued thawing" of the credit markets will positively affect global deal activity in 2010, with more than $20 billion of assets on the market and a pool of well capitalized international buyers seeking to secure supply and grow reserves, IHS Herold said.

"Despite current soft gas prices, the massive volumes of long-lived North American unconventional gas resources with minimal exploratory risk are extremely enticing for IOCs that seek to replace declining production from mature, conventional basins," Sheehan said. "Internationally we believe strategically driven Asian NOCs will continue their quest to secure global energy supply through the M&A market, with IOCs and independents battling for the same world-class assets."

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