Energy

As oil prices fell in 2008, so did M&A deal value. Overall, 2008 was a tale of two halves as the year started with a large number of transactions. The second half of the year brought falling commodity prices and a drop in deals that were precipitated by a fallout in the U.S. financial sector.

In the fourth quarter of 2008, deal activity dried up, with several potential deals cancelled and no new major deals announced. The final quarter showed oil and gas deal value down 59 percent compared to 2007 levels, and 72 percent compared to the same time period in 2006, according to PricewaterhouseCoopers.

Even before the worsening of the economic climate, big deals were few in number. Only two deals topped the $5 billion-plus mark in 2008, compared with 10 such deals in 2007. In total, the 2008 deal value was $180.4 billion – down 38 percent – compared to the high of $292.2 billion a year earlier. Still, the number of deals in 2008 (969) surpassed the mark of 893 deals in 2007. The majority of 2008 deals were valued at $250 million or less.

We believe the turnaround for M&A activity during 2009 will improve. Even without funding constraints being lifted, several oil and gas companies have healthy balance sheets and large amounts of available cash. Private equity investors will watch this sector of the energy industry closely.

In the U.S. utility sector, mergers and acquisitions will likely trend upward in 2009 as compared to the previous year. M&A, more than likely, will be a strategic part of companies’ plans as they respond to deregulated market opportunities and the capital market environment. Mergers may be necessary to raise capital for necessary improvements and new construction of additional transmission and distribution facilities. Support for critical infrastructure and renewable energy may also lead to less complicated regulatory M&A approval.

In the Mining sector, M&A deals and the total deal value dropped 4 percent in 2008. But the decline didn’t hit until the fourth quarter of 2008, creating a sudden alarm within the sector and triggering a rapid fall in most key commodity prices. It also sent deal volumes in a tailspin that had not been seen since 2005.

Activity by private-equity firms will likely increase this year as they search for low-cost opportunities. Small to mid-cap mining companies will likely end up selling in 2009 because they have insufficient revenue to continue operations. That will spark a restructuring of the sector as larger mining companies purchase assets of smaller companies at low prices.

Sources
Oil & Gas Deals: 2008 Annual Review, PricewaterhouseCoopers.
Power Deals: 2008 Annual Review, PricewaterhouseCoopers.
Mining Deals: 2008 Annual Review, PricewaterhouseCoopers.