First Quarter 2011 Oil and Gas M&A Hits $45 Billion, as Shale Resources Continue to Dominate

First Quarter 2011 Oil and Gas M&A Hits $45 Billion, as Shale Resources Continue to Dominate

The value of deals announced reached $45 billion in the global E&P sector during Q1 2011. A quarter in which the oil price broke through $100 per barrel on the back of increasing unrest in the North of Africa, and the world still clambered to get on board the movement towards shale resources. The total global upstream deal value of $45 billion is higher than all but three quarters over the past 3 years. That’s according to Evaluate Energy’s Global M&A database (www.evaluateenergy.com) which tracks all global E&P deals on a daily basis.

Shale Interest Drives North American Upstream M&A

After taking a back seat to Latin America in Q3 2010, North America re-emerged as the key player in the global upstream M&A sector with the majority of deals conducted there in the past two quarters. During Q1 2011 North America accounted for 45% of the deal value with over $20 billion worth of activity. Of this total 78% of the value came from shale resources.

The largest shale deal during the quarter involved PetroChina entering the Canadian shale gas sector. PetroChina paid C$5.4 billion for a 50% interest in Encana’s Cutbank Ridge assets in the Montney shale play. In a similar vein to the Indian Government, China has taken an interest in the North American shale sector due to the possibility of developing their own undeveloped domestic resources. With a near monopoly of shale expertise existing in North America, government backed Asian companies have been aggressively luring partners in the US and Canada to gather the required unconventional production techniques. China further demonstrated its intent to master domestic shale resource extraction during the quarter, with CNPC drilling the country’s first horizontal shale gas well.

Another large entrant into the shale resource sector was BHP Billiton with a US$4.75 billion acquisition of Chesapeake’s interests in the gas weighted Fayetteville shale play. The acquisition was at a distinct discount to PetroChina’s acquisition at $1.42 per proved mcfe compared to the $3.87 that PetroChina paid. The deal represents the first successful major acquisition for BHP since their failed attempts to acquire Rio Tinto in October 2010 and Potash Corp in November 2010.

These two major shale gas deals, which dominated the total value for the sector showed that there is still an appetite for shale gas resources despite subdued gas prices. In terms of the number of deals however the oil weighted Bakken and Eagle Ford plays have been dominant with over 40% of shale deals coming from these two plays. This trend may continue whilst the gas price remains suppressed due to North America’s oversupply of gas coupled with their current lack of LNG export facilities.

African Investment Continues Despite Unrest

Despite civil unrest spreading across the North of Africa from Tunisia to Egypt and Libya during the quarter, the rest of the continent remained open for business, with $5 billion worth of upstream deals. The largest deal in Africa during the quarter comprised of Total and CNOOC each taking a one third interest in Tullow Oil’s Ugandan Blocks 1, 2 and 3A for a total of $2.9 billion. The farmout has been mooted ever since Tullow Oil acquired full ownership in the blocks from Heritage Oil in Q1 2010, with the estimated development cost in excess of $10 billion proving to represent too much of a risk to a company with a market cap of little over $2 billion.

Another significant deal saw HRT Participações acquire the Namibia focused explorer, UNX Energy for $740 million. The acquisition followed shortly after UNX Energy upgraded their prospective resources for their blocks to a best estimate of 8.6 billion of boe (adjusted to 1.7 billion boe after factoring in the geological chance of success). Interest in the offshore Namibian exploration sector has been steadily building over the past 12 months, with the CEO of HRT, Mario Mello particularly confident that Namibia will prove to hold impressive oil reserves similar to the Brazilian pre-salt resources.

BP Signals Intent for Portfolio Shift

Following an aggressive divestiture program in 2010 following the Horizon oil spill disaster, BP made two major deals that signalled their intent for where the new focus of their portfolio will lie. The first deal was in Russia and involved an equity swap agreement with Rosneft that would result in BP gaining access to huge exploration fields in the Russian Artic. Whether the deal will go ahead however is currently in doubt due to TNK-BP successfully claiming that the deal violates an existing agreement between the two parties.

The second deal which proved to be the largest E&P deal from any company during the quarter, saw BP acquiring a 30% interest in 23 offshore Indian fields from Reliance Industries for $7.2 billion. Reliance were keen to gain BP as a partner due to their vast experience in deepwater drilling, while BP sees India as a major future growth market.

BP weren’t the only major to undertake a portfolio rationalisation during the quarter. Total, ConocoPhillips and Repsol-YPF all divested stakes that they held in subsidiaries for a combined total of $10 billion. ConocoPhillips completed the sale of its holdings in Lukoil with the remaining 6.6% stake sold on the open market for $3.3 billion. ConocoPhillips plans to use the proceeds for a programme of debt reduction and share buybacks. Total divested their entire 48.83% stake in CEPSA to U.A.E. based company, International Petroleum Investment Company for $5.1 billion which will make IPIC the sole owner of the company. The sale by Total was an implementation their strategy to reduce exposure to European refining which has experienced a drop in margins since the global economic downturn. Whilst Repsol-YPF sold a total of 10.5% of YPF for $1.7 billion in three separate transactions, including the flotation of an additional 6.67% of the company as American Depositary Receipts. Repsol has been steadily decreasing its stake in YPF, and aims to reduce its final holdings in its subsidiary to just over 50%. The proceeds of which are earmarked for their “Horizon 2014” plan, which includes the accelerated development of Latin American development projects such as their Brazilian pre-salt resources.

Top 10 Deals of the Quarter

* Normalised acquisition metrics have been adjusted for the value of non upstream assets and additional upside for probable, possible and contingent reserves.

As can be seen from the table it was the Asian National Oil Companies who were most willing to pay a premium on the market value of proved reserves during the quarter, even for North American gas weighted assets which have recently been changing hands at a discount to historical rates (BHP paid $1.42 per mcfe during the quarter). The normalised cost per proved mcfe equates to just under $4 for these companies, which is in line with the current final market price of gas, as per the Henry Hub benchmark. These metrics show that these companies are either optimistic about where the gas price will lie in the future, or they’re willing to make a financial loss in order to gain access to shale extraction technologies.

The heavily discounted price paid for Lukoil of $1.54 per proved boe, is typical for upstream deals in Russia, where profitability is restricted by the country’s unattractive fiscal regime. The typical Enterprise value/1P boe for the Russian Integrated companies is $3-$4 per boe whilst European and North American majors enjoy metrics of $15-$20 per boe.

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