Energy

Energy M&A Outlook 2010

As capital markets, both debt and equity, improve and the seller/buyer expectation gap narrows, expect increased mergers & acquisitions (M&A) activity in the energy industry for 2010. Production and exploration companies with large capitalizations have been steadily strengthening their balance sheets and overall offerings; these types of companies will look to fuel growth through M&A.

Oil was a major focus for 2009 overall and accounted for more than half of all M&A transactions enjoyed by the energy industry in the year, down from 72 percent in 2006. This trend is likely to continue as more people and governments look for alternatives to traditional energy sources. But look for oil-weighted assets to remain strong in the coming months at least.

Whereas 2009 saw a dismal beginning to the year’s M&A activity, the market was starting to pick up, with Q4 2009 being more than three times higher than Q3 2009 ($15.3 billion compared to $4.8 billion). In fact, Q4 2009 was responsible for more than one-third the total M&A value for the year, largely due to the hindrance caused by volatile commodity prices. Price WaterhouseCoopers writes: “Lower volatility in oil prices in recent months can be largely credited with bringing sellers back to the market. The market’s expectations for oil prices in January 2009 ranged between $39 and $113 per barrel, implying volatility of 82 percent… as the market managed to sustain oil prices above $50 per barrel, the industry gradually became more comfortable with asset valuations, as demonstrated by the acceleration of deal flow throughout the year.” In comparison, January 2010 benefited from a volatility half that of January 2009, or 41 percent. Crude oil prices ranged from $61 to $104 per barrel.

Natural gas will retain approximately the same volatility as last year (approximately 60 percent), tempered largely by a decrease in drilling activity that will cause the 1,000 cubic feet (Mcf) to be around 25 percent higher than last year ($4.01 versus an expected $5), making the natural G=gas sector a likely area of hot activity.

While expectations are not overly optimistic, they do signify a step in the right direction. Less volatility in commodity prices will serve to stimulate M&A activity in the industry overall. Companies that pursue M&A in 2010 will look to use M&A to uncover ways to reduce cost, maximize growth potential or simply take advantage of a bargain price.

SOURCES: PriceWaterhouseCoopers; Deloitte; Oil & Gas Financial Journal

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• Energy M&A Outlook 2009
• Energy and Utilities M&A Outlook 2008