Both corporate buyers and private equity players have returned to the acquisition trail in 2010, following an extended period of muted activity. With many sitting on cash reserves and seeing more opportunities to invest, deal activity has increased through the year.
The latest research from Ernst & Young suggests further bright prospects for 2011. The Ernst & Young Capital Confidence Barometer, a regular survey of over 1,000 senior executives from large companies in 36 countries, gauges corporate confidence.
Almost 10% of companies surveyed were from the oil and gas sector and their responses are more optimistic on prospects and also mergers and acquisitions (M&A) outlook. Nearly half of oil and gas respondents said they were actively looking at growth through M&A, while 70% expect to execute a transaction within two years.
This year, the interest shown in Dana Petroleum by the Korean National Oil Co dominated the headlines throughout the summer and the Koreans clinched the £1.9billion deal in September, despite a spirited defence by Dana.
This acquisition is consistent with a trend of Asian economies seeking to grow their resource bases – Vedanta’s proposed investment in Cairn India being another recent example. It highlights the increasing prominence of national oil companies, as well as the continued strong prospects for the UK upstream sector. Indeed, for the UK, Wood Mackenzie pointed to “a resurgence in investment, potentially to higher levels than before the economic crisis”.
The Dana deal was also part of a wider trend of substantial M&A activity in the oil and gas sector. Based on data from IHS Herold, transactions in oilfield services (OFS) also rocketed in 2010, with announced deals of more than $23.9billion over the first nine months of the current year compared with just $10.3billion during the same period in 2009.
Flagship deals included the agreement between Schlumberger and Smith International in February, an all-share deal that valued Smith at $12.4billion, a 37.5% premium on the pre-announcement price. Sclumberger saw the opportunity to create a fuller drilling services offering in a single organisation, as it forecast the need for higher levels of drilling to sustain world production.
The summer saw the tie-up of Subsea 7 and Acergy, announced in June, a deal to create a business valued about $5.4billion. Management pointed to the “growing size and technical complexity of subsea projects, driven by the demand to access ever more remote reserves in increasingly harsh environments” as a driver to combine the businesses. The deal – also paid for in shares rather than cash – was well received and on announcement, the share prices of both businesses rose by more than 10%.
VetcoGray owner General Electric also returned to the acquisition trail this year, announcing a cash deal to acquire Dresser, a Texas-based gas engine manufacturer for $3billion, representing an estimated 9.5 times 2010 EBITDA (earnings before interest, taxes, depreciation, and amortization).
The US was also an active market in upstream transactions and Chevron announced the acquisition of Atlas Energy for $4.3billion in November. Atlas is a gas producer with a significant position in Pennsylvania’s Marcellus shale where several other super-majors invested this year.
Such deals may prompt further activity that will ripple through the sector as other players look to consolidate to gain scale and avoid being left behind, while newly enlarged businesses restructure their operations and evaluate disposals of non-core operations. After Baker Hughes’ recent acquisition of BJ Services, for example, it disposed of its Gulf of Mexico stimulation and sand control operations in the summer for $55million.
Closer to home, as 2010 draws to a close a number of corporate players have the cash resources and/or finance in place for acquisitions and see now as the time to expand geographically or grow capabilities through bolt-on acquisitions.
One such deal on which Ernst & Young advised was the purchase of Maine-based SGC Engineering by Senergy, the fast-growing Aberdeen energy services business. This secures Senergy’s foothold in North America and consolidates its position in the alternative energy sector.
Further examples of strategic bolt on acquisitions by major service companies were the sale of ERT to Fugro and the sale of Stephen Gillespie Consultants to Petrofac, both of which were completed by Ernst & Young this year.
Upstream, Aberdeen-based Faroe Petroleum continued to expand its reserve base with an acquisition of an 18% interest in the Blane field from Eni.
Another trend that looks set to continue is that of forced accelerated disposals arising from distressed and over-leveraged groups. Here, purchasers prepared to move quickly can secure viable parts of the company, safeguarding jobs while growing their own operations.
One such example was the acquisition of several subsidiaries of Sovereign Oilfield Group, which was put into administration in the spring. Ernst & Young advised Global Energy Group on this deal which was completed in just 10 days, showing that deals can still get done quickly, even in the current climate.
There is also likely to be increased private equity activity, from those houses not burdened with poor performing portfolios. There is a particularly healthy appetite for OFS companies that have strong management teams and display the right blend of geographical spread, sub-sector specialisation, customer base and order book.
Although corporate acquirors have led many of the major recent deals, a number of financial buyers are now actively looking for investments in the sector, as they are attracted by the growth opportunities.
Private equity houses are, however, constrained by availability of debt towards deals. Interesting tactics used recently by some private equity houses to combat this include financing deals with their own equity at the outset, then refinancing and injecting bank debt some time afterwards, giving them a competitive advantage and enabling them to move quickly on quality opportunities.
The number of acquisitive and cash-rich trade buyers allied to the strengthening private equity market has helped to stimulate deal flow and improving valuation multiples are providing increased confidence for shareholders that now is the right time to sell.
It is worth remembering, however, that public markets remain volatile, and oil and gas companies remain susceptible to resultant pressures. The dearth of initial public offerings, in particular, was highlighted by the planned flotation of Fairfield Energy by private equity backers Warburg Pincus that was cancelled in July due to weak investor interest.
Nevertheless, more than £3billion of new money was raised by oil and gas companies on London Stock Exchange’s Main Market and Alternative Investment Market during the first half of the year.
On the AIM market, activity has improved throughout, with oil and gas companies tapping investors for £467million in Q2, compared with just £182million in Q1.
One notable new admission to the Main Market was Essar Energy, an India-focused company which raised £1.2billion and joined the FTSE-100 index on listing.
And Enquest, a UK-focused oil production business formed from the demerged UK North Sea assets of Petrofac and Lundin Petroleum, listed on the stock exchange in April.
Enquest itself announced its first acquisition, Stratic Energy Corporation last month (November), increasing its North Sea reserves by over 7million barrels oil equivalent and showing that even as international buyers show interest in consolidating today’s major businesses, new leading oil and gas players continue to emerge in the UK.
Barry Fraser is transactions advisory services director for Ernst & Young in Scotland.