Fueled by national oil companies and foreign interest in North America’s unconventional natural gas and oil, global merger and acquisition (M&A) activity hit a record high $75 billion in 2011, according to the IHS Herold 2012 Global Upstream M&A Review. The record-breaking amount represents nearly half (48%) of total worldwide upstream acquisition spending last year, IHS Inc. noted.

“Cross-border buyers, led by Asian-based investors, continued to stream into North American unconventional resource plays through asset partnerships and select corporate deals, with a bullish view on potential LNG [liquefied natural gas] exports to the Asia-Pacific region in the coming decades,” said IHS Director of Energy M&A Research Christopher Sheehan. “In 2011high crude oil and international gas prices were juxtaposed against persistently depressed North American natural gas prices, leading to a 15-year high in deal counts outside North America.”

U.S. transaction value in 2011 reached a 10-year high despite a lower deal count than in 2010, as large joint-venture asset acquisitions by overseas buyers fueled M&A activity. The United States accounted for about half of global upstream M&A spending, “well above its historical average,” IHS noted. Producing oil assets commanded a large deal price premium to natural gas properties, with a growing focus on liquids potential in emerging basins.

“Established shale gas and emerging shale oil and tight oil plays in the U.S. are attractive to foreign buyers since these plays offer massive discovered resources with low exploration risk in a country with relatively high political and fiscal stability, versus other global regions such as the Middle East, Africa and Latin America,” said Sheehan. “The longer-term potential of LNG exports to the Asia-Pacific from Canada and the U.S. is a strategic driver of many of the cross-border shale gas acquisitions in North America.”

Meanwhile, decade-low deal pricing for conventional gas assets, and the upside from liquids-prone plays, attracted increased M&A spending by private equity buyers seeking to benefit from a longer-term North American natural gas price revival.

Total global upstream M&A transaction value, including corporate mergers, fell 30% from an all-time high in 2010, which was driven by massive asset divestiture programs. Corporate deal value in 2011 rose 19% to more than $58 billion, including Australian-based BHP Billiton’s takeover in the United States of unconventional resource-focused Petrohawk Energy, the first upstream corporate merger valued at more than $10 billion since ExxonMobil Corp.’s $41 billion buyout of XTO Energy Inc. in late 2009 (see Daily GPI, July 18, 2011; Dec. 15, 2009).

Deal flow also increased in all regions outside the United States and Canada as international investors pursued prolific discoveries in deepwater Brazil and Africa, among other regions, Sheehan noted. In Australia, the coal seam gas-to-LNG market consolidated further, and evolving markets such as Iraq’s Kurdistan region also welcomed new M&A participants.

“These areas are enticing international investors who continue to face access barriers in established hydrocarbon basins such as Venezuela, Russia and in the Middle East. World-class oil assets continue to be highly sought after by both cash-rich national oil companies and international integrated companies that continue to struggle to materially grow reserves through the drillbit.”

In the international gas markets, growing Asian LNG demand is expected to increasingly fuel M&A activity from Australia to East Africa, IHS noted. In these regions, Sheehan said he believes small-cap international explorers that own huge resources, but lack sufficient development capital, will increasingly become takeover targets, particularly as the European debt crisis has impacted their access to and the costs of capital.

Continued uncertainty in commodity price direction, wide-ranging geographic oil and gas price spreads, fragile global economic conditions, and limited or higher cost access to capital for many upstream companies are challenging strategic decision making in the industry and causing a consensus gap between potential buyers and sellers.

“We believe that, in the present volatile environment, global upstream M&A consolidation will accelerate in 2012 and beyond as the well-financed ‘haves’ prey on the capital-constrained ‘have-nots.’ Many of the latter are key holders of massive undeveloped gas and liquids resources that can provide material growth opportunities or establish a strategic foothold in emerging basins,” said Sheehan.

“Consolidation, including a rise in corporate takeovers, will be led by national oil companies and sovereign-wealth funds, major integrated companies, global industrial conglomerates and private-equity investors, who all seek opportunistic purchases of capital-intensive oil and gas assets and financially strained companies that own prolific resource potential.”

©Copyright 2012Intelligence 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.