U.S. oil and gas merger and acquisition (M&A) activity will be stronger this year as companies attempt to position themselves for higher prices and increased demand, according to a nationwide survey of CFOs at 100 exploration and production companies.
BDO USA LLP’s 2013 Energy Outlook Survey, which was published last week, was conducted in September and October.
More than half (53%) of CFOs expect M&A activity to increase this year, the second consecutive year most of the financial officers have predicted an upward trend (see NGI, Jan. 16, 2012). A portion of the latest report was issued in late November; CFOs had said then they were cautious but optimistic about unconventional production in 2013.
“Despite a weak national economy, and some uncertainty over the ability to access capital and credit, overall market conditions have created an environment conducive to M&A activity,” said BDO’s Charles Dewhurst, practice leader in the Natural Resources industry group. “The energy sector has seen a lot of consolidation in 2011 and 2012. Companies anticipate this trend will carry over to 2013, buoyed by several factors, including the continued exploration and development of nonconventional resources.”
A focus on revenue and profitability is considered the top driver this year for M&A. Thirty-six percent of CFOs noted the need for companies to be cash-positive, and 29% suggested that “undervalued oil and gas assets will help push more companies to consider a merger or acquisition.”
Only 3% of those surveyed thought M&A would be the “primary driver” for industry growth this year. “Moreover, the pursuit of a merger or acquisition is cited by just over a quarter of CFOs (26%) as a top option for increasing shareholder value, polling slightly behind a focus on nonconventional areas (28%),” BDO noted.
The survey also found that access to capital and credit remains in limbo.
“After a jump in optimism in 2011, CFOs are reining in their expectations that they will be able to access capital in the coming year. While a majority (59%) say they feel better about it, this still represents a 19% percent decrease in the number of CFOs expressing positivity since 2011. Forty-one percent report feeling worse, up from 27% last year.”
Companies also are tying executive compensation more to performance, the survey found. “CFOs have expressed a consistent desire to link the two areas for the past five years, and the study reveals 58% amended their executive compensation programs in 2012 to improve the pay-performance connection,” the highest percentage since the survey’s inception.
“I think this demonstrates a calculated and proactive effort on behalf of companies to strengthen their internal infrastructure by more closely aligning their pay to measurable outcomes,” said BDO’s Lance Froelich, senior director in the Compensation and Benefits practice. CFOs are confident they will continue to profit from their companies’ successes: 89% expect their compensation to remain about the same or improve in 2013. “This suggests a fundamental optimism by CFOs that their companies will continue to perform in 2013 and that success will be reflected in their incentive pay.”
About two-thirds of those surveyed expect employment in the oil and gas sector to remain “relatively consistent with that of 2012.” However, one-quarter of the CFOs “expect an uptick in the number of personnel employed by their company in the coming year, while only 8% predict a decline…”
PLS Inc. and Derrick Petroleum Services said separately last week that global upstream deals in 2012 jumped 50% higher year/year to a record $254 billion in 679 deals. The Global M&A Energy Transactions Database noted that in 2011 there were 842 global deals for $170 billion. The prior M&A record was in 2010 when deal amounts totaled $212 billion for 684 transactions, noted PLS Managing Director Brian Lidsky. Three “mega deals” in 2012 accounted for more than one-third of the total transactions at $97 billion, or 38%, he said.
Russia’s state-owned oil company OAO Rosneft had the biggest deal of 2012, paying $62 billion to acquire TNK-BP, formerly half-owned by BP plc (see NGI, Nov. 5, 2012). The second and third top transactions were in North America: CNOOC Ltd.’s acquisition of Canada’s Nexen Inc. for $18 billion (see NGI, Dec. 10, 2012a); and Freeport-McMoRan Copper & Gold’s $17.2 billion purchase of Plains Exploration & Production Co. and McMoRan Exploration Co. (see NGI, Dec. 10, 2012b).
“Excluding these mega-deals, 2012’s activity in terms of deal value is on par with the prior five-year annual average of $160 billion of deal activity annually,” according to the report. In the last three months of 2012, “we witnessed an unusually high level of deal activity totaling $137 billion in 181 deals.” Many sellers “were motivated to complete deals in advance of the uncertainties surrounding the second term of President Obama and the implications of U.S. governmental policy changes regarding the fiscal cliff.”
Globally, the United States led upstream oil and gas deal activity with one-third of the total deal value, with 299 deals for $83 billion, followed by the Former Soviet Union (23 deals, $75 billion), and Canada (194 deals, $50 billion).
This year, M&A is expected to “track back to normal as growing oil supplies, particularly in the North American market, have a number of analysts expecting oil prices to maintain current levels or trend lower” (see related story). “The market has a healthy level of inventory as currently we are tracking over $85 billion of assets for sale where the estimated deal value is greater than $100 million.”
As of Jan. 1, upstream assets for sale “stood at over $85 billion,” noted PLS and Derrick. “New large deals in the pipeline recently announced include ExxonMobil’s intent to sell 60% of the West Qurna-1 oilfield in southern Iraq, Murphy Oil selling select Canadian assets, and Total continuing a global noncore divestiture program.”
The deal flow for oil and gas transactions is expected to moderate from the year-end 2012 rush.
“Forces that will impact global dealmaking in the coming year include multi-year lows in North American gas prices that many believe have stabilized, a growing oil production profile in North America, a return to normal in the Gulf of Mexico, large and high-impact discoveries in East Africa, continued buying by Asian and Chinese firms especially to secure LNG feedstock, and political unrest in the Middle East.”
©Copyright 2013Intelligence Press Inc. All rights reserved. The preceding news reportmay not be republished or redistributed, in whole or in part, in anyform, without prior written consent of Intelligence Press, Inc.
© 2020 Natural Gas Intelligence. All rights reserved.
ISSN © 2577-9877 | ISSN © 1532-1266 |