Global oil and gas

transactions review 2009

Introduction

Corporate oil and gas valuations started 2009 at subdued

Welcome to Ernst & Young’s review of global oil
and gas transactions in 2009. In this report we
look at some of the main trends in oil and gas
merger and acquisition activity in the last 12
months and consider the outlook for deal activity
across the sector in 2010.
levels, reflecting depressed commodity prices and wider capital
markets malaise. This presented opportunities for well-capitalized
acquirers, such as Asian reserve-seeking National Oil Companies
(NOCs), but naturally drove sellers toward asset-level transactions.
Overall, would-be acquirers had the upper hand and the total
value of announced corporate transaction levels were up
considerably in 2009, accounting for 66% of total deal value
compared to 44% in 2008.

We concluded our publication last year by predicting that The positive trends that we have seen in recent months are likely
the global economic downturn may lead to a slowdown in oil to continue into 2010, and the outlook for oil and gas transactions
and gas activity in the next 12 months, but the longer-term is healthy in upstream and oilfield services. In the downstream
fundamentals remain favorable. 2009 has indeed been a year of world, over-capacity in some regions is likely to drive a longer
considerable challenge for many, but opportunity for some, and period of uncertainty and transactional challenges. But as this
the fundamental outlook for the sector continues to look positive. year has aptly demonstrated, one person’s challenge represents
It’s clearer a year later that there is light at the end of the tunnel, another’s opportunity.
rather than a train coming toward us.
In total, 837 deals were announced in 2009, with upstream
accounting for 72% of these. The volume of deals was down 24%
compared to the previous year. The total value of oil and gas
transactions announced globally stood at US$198b, up some
10% compared to the previous year. This is perhaps surprising
given lower than average commodity prices in 2009, although
the statistics have been dominated by a few large transactions.
If Exxon had not announced its US$41b acquisition of XTO in
December, the figures would have looked very different.
M&A activity was much stronger in the second of half of 2009
(485 deals versus 352 in the first half), reflecting the improving
capital market conditions and growing consensus on oil
price outlook.

1 Global oil and gas transactions review 2009

 Andy Brogan Jon Clark
Global Oil & Gas Director
Transaction Advisory Oil & Gas M&A
Leader
+44 (0) 20 7951 7352
+44 (0) 20 7951 7009 jclark5@uk.ey.com
abrogan@uk.ey.com

Global oil and gas transactions review 2009 2

Upstream
2009 has witnessed the much speculated green shoots of
recovery in the upstream sector. The oil price has strengthened,
equity capital is starting to flow back into the sector, development
projects are coming back on stream with increasing frequency,
and stronger exploration budgets are being set for 2010.
However, the year has been uncomfortable for many across the
sector. The mixed fortunes of the upstream universe continues
to leave a wide divide between the haves and have-nots. The
increased oil price may have generated a flurry of equity
investment, but funding constraints continue to affect many, be
it equity or debt, and the success of proposed IPOs in 2010 will
be carefully monitored. Companies’ increased cost of capital
has not necessarily been factored into transaction valuation
methodologies as much as might be expected.
Commodity pricing, another key valuation parameter, has not
been universally positive either. Oil has spent the second half
of the year hovering around the anticipated US$70 per barrel
mark, a welcome improvement for many from the mid-30s seen
at the start of the year, but there is an ongoing short-term pricing
concern given depressed levels of global demand and surplus
OPEC capacity. Natural gas pricing has had a tougher year,
and possible development projects continue to face delays as
companies wait for improved pricing and stability.
In a year of ups and downs for the industry, M&A activity began
to pick up pace, increasing by volume quarter by quarter over
the first three quarters of the year. Improved access to funding
and relative economic stability have encouraged those that can
to take advantage of reduced valuations and less competition
for opportunities. This has largely been to the benefit of well-
capitalized organizations with a long-term commodity outlook or
800
600
Deal volume
400
200
0 0
2008 2009
Asset Corporate
3 Global oil and gas transactions review 2009
need, such as Asian NOCs with growing energy-hungry economies
and gas utilities seeking a physical hedge. Deal activity within the
independent sector has been lower.
Corporate deal volumes on the up through a
period of more depressed share prices
Despite the increased M&A activity in the second half of the
year, transaction volumes fell short of 2008 levels, with 605
upstream transactions announced in 2009 versus 730 in 2008.
Significantly, asset deals showed a 22% drop in volume from 2008
levels while the number of announced corporate transactions,
was consistent with 2008 levels, accounting for 21% of deals by
transaction volume and over 70% by deal volume as acquirers
looked to take advantage of depressed market pricing.
The combined value of announced deals in 2009 was US$149b
according to data from IHS Herold Inc. comparing favorably to the
US$112b in 2008. However, two transactions made up US$62b
of the value being Exxon Mobil’s announced deal with XTO and
Suncor’s acquisition of Petro-Canada.
North America continues to be the most
active market
A little over 50% of global upstream deals announced in 2009 were
in North America, down from the 80% bias that we reported last
year. While Canadian volumes were consistent, 2009 witnessed a
42% drop in US deal volume. This is a clear demonstration of the
market impact of difficult funding conditions and a challenging
short-term natural gas outlook in North America.
160
140
Deal value (US$b)
120
100
80
60
40
20
2008 2009
Asset Corporate
 350

300

250
Deal volume

200

150

100

50

0
da

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ia d

US

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As

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Af

an d

Eu
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Ca

Ca eri l/S

Un r S
O ral

e
Am ntr
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Au

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Fo
Number of transactions 2008 Number of transactions 2009

In terms of deal value, North America accounted for over 65% of
announced transaction values according to IHS Herold Inc, with 5
of the 10 largest transactions targeting North American reserves.
Exxon Mobil’s announced US$41b acquisition of XTO in December
and Suncor’s US$21b acquisition of Petro-Canada in March were
the year’s largest announced transactions, and are reflective of
a longer-term outlook being taken on unconventional resources,
such as oil sands and shale gas, from the larger independents and
International Oil Companies (IOCs). More generally, however, the
relative weakness of natural gas prices in the US shifted acquisition
activity back to conventional reserves; oil represented about
50% of acquired US proved reserves for the year until Exxon’s
announcement swung the bias back to natural gas.
US private equity activity in the upstream sector showed strong
signs of improvement during the second half of the year. Sizeable
private equity investments included: Global Infrastructure
Partners’ investment of US$588m in Chesapeake Midstream
Partners; First Reserve Corporation’s US$500m investment in
Southeast Asia-focused KrisEnergy; Apollo Global Management’s
US$500m acquisition of Parallel Petroleum; and KKR’s US$350m
investment in East Resources. We anticipate a renewed interest in
the sector from private equity through 2010. There is, however,
a backlog of businesses to exit that may affect the quantity and
timing of new investments.
Government-sponsored, such entities typically rely less on
external financing, which is a key advantage in a funding-
constrained market. Sinopec’s US$9b acquisition of Swiss oil
explorer Addax, announced midway through the year, and KNOC’s
US$4b acquisition of Harvest Energy Trust in October are among
the top five transactions by value this year. Both transactions are
representative of Asian NOCs, recent international expansion and
deep pockets — Chinese NOCs, for example, have spent almost as
much this year on upstream investments as they have over the
last five years combined. Their focus isn’t just on conventional
reserves — PetroChina’s US$1.7b purchase of a majority stake
in undeveloped steam assisted gravity drainage (SAGD) projects
represents the largest Chinese NOC acquisition in the Canadian oil
sands to date.
IOC-NOC joint ventures are indicative of
future trends
We anticipated at the start of the year an increasing likelihood of
additional strategic partnerships between NOCs and IOCs. These
arrangements offer reserve-hungry NOCs access to reserves
and experienced international partners, while the IOCs benefit
from access to capital and potentially service or infrastructure
capabilities. Many of the recent license awards in Iraq exemplify
this theme.

Asian NOCs funding rapid expansion
National oil companies were the focus for much of the M&A
speculation in 2009, targeting reserves and production to
support continued domestic economic growth. Being
Looking forward, things may be less positive for IOCs in these
arrangements as we predict that reserve-seeking NOCs in
certain areas may partner directly with other reserve-holding
NOCs, leveraging political ties to access opportunities and
expand operations.

Global oil and gas transactions review 2009 4

CNPC and KMG’s US$3.3b acquisition of MangistauMunaiGas
(MMG) from Central Asia Petroleum and China National Offshore
Oil Corporation (CNOOC) and Qatar Petroleum’s E&P sharing
agreement are examples of the adoption of more international
NOC partnering. With Sinopec’s acquisition of Addax resulting in
its exclusion from the second Iraq licensing round, NOCs may look
to be more selective in their targeting.
Outlook for 2010
With stability comes market confidence, and we have seen equity
investment returning to the sector. A number of IPOs are planned
for 2010, and if successful, we can expect to see increasing
investor interest in the sector. Lessons have been learned
regarding the risks of investing in single-asset, pure exploration
companies, so we anticipate that companies successfully coming
to market will have larger portfolios, probably spread from
exploration into production operations.
Further commodity pricing volatility is likely in the short term
as global demand is predicted to remain below supply capacity
Service costs have fallen in 2009, and 2010 may see a
return to investment in longer-term capital projects, often in
unconventional resources, such as shale gas, oil sands, and
coal bed methane. The heavy investment requirements of these
projects has left a number of IOCs without financing options
to meet required development costs, and these continue to be
targets for those with liquidity.
A large proportion of the junior universe continues to face financial
difficulties. Although investors have demonstrated appetite for
secondary financing, much of this is aimed at the larger entities
with current or near-term production opportunities. There has
been less consolidation activity at the smaller end of the market
than expected, but because financing remains hard to come by and
asset inactivity continues, many of these entities will be forced to
take action or face asset relinquishment.
Top 10 transactions by value
120
Deal value (US$b)

into 2010. As economic recovery drives demand growth, greater 100

pricing stability is expected in the medium term, although the
precise timing and shape of recovery remains a subject of much- 80
speculation. This strong medium-term consensus will be a key 60
enabler in upstream transactions in 2010 as buyers and sellers
share the outlook for a critical component of pricing. 40

NOCs have arguably been more active than the majors in 2009, 20
but Exxon Mobil’s announced acquisition of XTO may be the trigger 0
for a wave of acquisitions as the majors emerge from a year of 2008 2009
restructuring and internal reorganization with balance sheets that
are stronger than many, certainly looking across other industries.

Largest announced deals of the year by value

Announced Buyer Seller Deal type Value (US$m)
14/12/09 Exxon Mobil Corp XTO Energy Corporate $40,992
23/03/09 Suncor Energy Petro-Canada Corporate $20,683
24/06/09 CPC; Sinopec Addax Petroleum Corp Corporate $9,022
01/11/09 Denbury Resources Encore Acquisition Co. Corporate $4,465
21/10/09 KNOC Harvest Energy Trust Corporate $4,148
07/04/09 Gazprom Eni SpA; Gazprom Neft Asset $4,104
17/04/09 CNPC; KazMunaiGas Central Asia Petroleum; Mangistaumunaigas Corporate $3,300
05/08/09 Petrobank Energy & Resources TriStar Oil and Gas Ltd Corporate $2,547
30/03/09 AFK Sistema Ural-Invest LLC Corporate $2,500
Agidel-Invest LLC
Inzer-Invest LLC
Yuryuzan-Invest LLC
10/07/09 Centrica plc Venture Production plc Corporate $1,747

5 Global oil and gas transactions review 2009

Downstream
Continuing decrease in transaction activity
during 2009
The downstream sector experienced further decline in transaction
volumes during 2009, continuing the downward trend which
started in the previous year. There were 153 transactions in the
sector in 2009, some 30% lower than 2008. The disclosed value
of downstream transactions was US$38b in 2009 compared to
US$40b a year earlier.
The diverse buyers involved in downstream transactions included
IOCs, NOCs, independents and private equity. Based on disclosed
values, the top 10 deals in the sector during 2009 had a combined
value of US$24b, accounting for some 65% of the disclosed value
of all transactions in the sector globally.
Included in the largest announced transactions of the year were
Enterprise Products Partners’ acquisition of TEPPCO Partners for
US$5.9b, E.ON’s sale of its wholly owned subsidiary Thüga AG to
the municipal buyer consortium Integra/KOM9 for US$4.3b, and
Snam Rete Gas S.p.A.’s (Snam Rete) acquisition of Eni’s natural
gas distributor Italgas S.p.A (Italgas) for US$3.8b. Snam Rete is
50.03% owned by Eni and Italgas was wholly owned by Eni. As a
result of this divestment, Eni has exited regulated gas distribution
activities in Italy, as required by the local regulators.
Similar to 2008, the volume and disclosed value of asset
transactions exceeded those that were corporate in nature. There
were 127 announced asset transactions with a disclosed value of
US$19.2b, compared to 26 corporate transactions with a disclosed
value of US$18.7b. Over 45% of downstream transactions volumes
were in North America (70), with Europe (38) and Asia (21)
together accounting for a further 40% of volumes.
Global oil and gas transactions review 2009
No shortage of refining opportunities
in 2010
World oil product demand is estimated to decline by 2.5 million
barrels per day during 2010 due to the economic downturn.
Recovery in oil product demand in the short term is anticipated
to be slow due to the weak global economic growth and could
potentially be significantly dampened should the US Senate vote
favourably on a comprehensive carbon regulation.
As such, there is significant over-capacity in the global refining
sector, predominantly in North America and Western Europe.
Furthermore, additional refining capacity scheduled for the short
term, particularly in Asia and the Middle East, would exacerbate
this issue.
Excess refining capacity is one of the principal factors fueling the
current environment of low utilisation and low margins. Refiners
are looking to address these issues through one or a combination
of the following:
► Partial shutdowns of key refineries and of full shutdowns of
less complex sites
► Postponing new refining capacity and upgrading projects
► Divestment of non-core refining assets
There were 13 refining transactions during 2009, and a
number of refineries are currently being divested. We expect
that the major integrated oil companies, as well as independent
refiners, will continue to divest their non-core refining assets
throughout 2010. There is likely to be interest from various
groups of buyers, including those from Asia, for the relatively
complex refining assets.
On the other hand, interest for relatively simple refineries
is expected to be low and would probably end up being
converted as storage facilities to defer expensive remediation
and clean-up costs.
6
No shortage of retail marketing
opportunities
Plans by major integrated oil companies for expansion or
improvement of their retail marketing networks in developed
countries will continue to be trimmed, primarily driven by:
► Strategic focus on upstream — in part due to the higher level of
returns but also because integrated oil companies are judged
on their ability to replenish reserves. Hence capital expenditure
is weighted towards exploration and production.
► Prioritization of limited downstream capital expenditure
towards growth regions such as Asia.
There were 27 retail marketing transactions during 2009. In 2010,
we expect that major integrated oil companies will continue with
their divestment plans to exit from mature retail markets, driven
by a combination of increasing network maintenance requirements
and challenges in reaching required economies of scale.
In general, as marketing margins are usually more robust than
refining margins, we expect to see continuing interest from various
parties for retail marketing assets, particularly those with decent
throughputs, strong non-fuel offerings and an ability to benefit
from existing supply arrangements.

50 250
Deal value (US $b)

40 200
Deal volume

30 150

20 100

10 50

0 0
2008 2009 2008 2009

Asset Corporate Asset Corporate

7 Global oil and gas transactions review 2009

Oilfield services

Transaction activity plunged in oilfield services in 2009.

Opportunities in adversity
From the highs of Q2 2008, when IHS Herold recorded 73 Despite the doom and gloom in the market, numerous major
announced transactions with a combined value of more than oilfield services (OFS) companies entered the downturn with
US$13b, by Q1 2009 transaction levels had slumped to just strong balance sheets, having elected to hold on to cash rather
13 deals, with a total value of below US$1.4b (based on deals than spend it on acquisitions at the top of the market in 2008.
where transaction values were disclosed). The evaporation Some players began to put these war chests to use. FTSE250-
of funding, the impact of lower oil prices and cutbacks from listed John Wood Group, for example, said at the start of the year
operators were the chief causes. that it expected to see opportunities, and that the extension of
its £950m loan facilities would enable it to pursue them. By the
An analysis of deal statistics reveals some interesting trends.
end of the year, Wood Group had concluded several transactions,
Based on transactions where the deal value was revealed, the
in Europe, the Americas and Asia-Pacific including the US$38m
average value fell year-on-year from US$237m to US$192m.
acquisition, for cash, of Baker Energy — the energy business
This reflects the near-impossibility of concluding billion-dollar
of Michael Baker Corporation, the energy and engineering
buyouts for a period in 2008-09. In 2008 there were seven
consultancy listed on the NYSE Amex exchange.
deals greater than US$1b in disclosed value, with financial
investors such as Alpinvest, First Reserve and JC Flowers A second trend was a rise in distressed sales, where deals were
among the investors. Last year — there was just one, and it done, often at nominal prices, to take assets – and sometimes
was a trade deal (Baker Hughes’ acquisition of BJ Services liabilities – off the hands of sellers who were retrenching to focus
discussed on page 9). Even in the absence of mega-deals, a on core operations. One indicator of this shift is the increase in
handful of larger deals made up the bulk of the US$11.3b total the proportion of deals that comprised the trade and assets of a
disclosed value of 2009 OFS transactions. The top ten deals business, as opposed to corporate transactions. In 2008, less than
made up 76% of this amount. Excluding the Baker Hughes one-third of OFS deals were sales of the trade and assets; a year
deal, average transaction values were more than halved later, 54% of deals were in this form.
compared to 2008, to US$110m.
Looking at transactions by geography, North America
continued to be the most active market for mergers and
acquisitions, with 60% of deals involving a target primarily
located there. This proportion was unchanged from last year.
Although it is risky to draw strong conclusions based on such
a quiet market, Asia and Africa were comparatively active
with 26% of all deals taking place there, up from 15% last year
(though the actual number of deals was lower). European
deals fell sharply from 21% of the total to 13%.
The year was not without excitement on the corporate front
however. Three themes were notable:
► Buyers who entered this phase of the cycle with strong
balance sheets took advantage of others’ distress to
complete opportunistic bolt on deals.
► Money could still be found for top-quality transactions.
► Deal flow and expansion planning began to pick up towards
the end of the year.

Global oil and gas transactions review 2009 8

 80
Announced transaction volumes
70
60
50
40
30
20
10
0
Q1 Q2 Q3 Q4
2008 2009
A good deal can still be done
There was a handful of landmark deals during the year. Pick
of the bunch is surely Baker Hughes’ US$5.5b acquisition of
BJ Services, announced in August. This was the biggest OFS
transaction in more than a decade. It represented 44% of the
disclosed value of all deals during the year.
BJ’s pressure-pumping expertise — technology to increase
production by injecting water and chemicals into wells — was a
key driver for uniting the two Houston-based businesses, with
Baker Hughes forecasting that this side of its business will grow
from its present 1% of revenues in 2008 to more than 20% post-
acquisition. Transforming this side of the business will enable
Baker Hughes to catch up on its major OFS competitors in the
sector, such as Schlumberger and Halliburton. The deal was
priced at a 16% premium to BJ’s pre-announcement stock price,
and was paid in a combination of cash and shares, leaving BJ
stockholders with a stake of around 27.5% in Baker Hughes.
BJ, spun out of Baker Hughes in the 1990’s, had long been
touted as a natural fit in an environment where the integrated
OFS model is popular once more. The deal was done in the
region of 6.9 times trailing EBITDA, although BJ had recently
posted a Q3 net loss of US$32.3m. BJ’s shares rose 4.2% and
Baker Hughes’ fell 9.6% as the deal was announced.
By way of contrast, one of the top UK transactions was the
June acquisition of Wood Mackenzie, the Edinburgh-based
consultancy and research provider to the global energy,
metals and mining sectors. While Woodmac is not a typical
OFS business, the deal was important because it showed that
leveraged deals could still be done — a trend that emerged
across several industries as the year wore on — and that
mainstream (as opposed to specialist) private equity houses
were still keen to get oil and gas exposure. It was a positive sign
of the rising market that by the end of the year the Woodmac
deal no longer held the crown for the biggest UK private equity
deal of the year.
9 Global oil and gas transactions review 2009
Breakdown of transactions
Baker Hughes' acquisition
of BJ Services
Other top 10 deals
by value
Remaining deals where
value disclosed (57 deals)
The £553m deal, concluded in a matter of weeks, was a
landmark for leveraged deals. Private Equity News reported that
four equity providers were shortlisted to back the deal: Bain
Capital, Charterhouse, Hellman and Friedman, and Warburg
Pincus. On the banking side, the deal was backed by £170m
of debt (as well as £70m of mezzanine finance). The lenders,
including HSBC, Lloyds Banking Group and Nomura, had
syndicated their loans, according to Private Equity News.
The deal also relieved pressure upon Candover, which was in the
middle of a stabilization program. Its shares rose more than 10%
on 19 June, when JP Morgan Cazenove predicted proceeds of
the sale would revalue Candover’s portfolio upward by 18%. Sale
proceeds to Candover itself were £36.2m.
Recovering deal activity to continue
into 2010
By Q4, deal volume had clearly picked up from Q1’s slow start,
as the graph shows. The examples given above suggest a
number of positive trends for 2010, buy it may take longer to
play out fully. Funding conditions, both on the debt and equity
sides, are improving as private equity begins to refocus on
external opportunities rather than managing existing portfolios.
As valuation expectations of sellers adjust from the heady days
of 2007, trade buyers are back in the game. The public markets
are recovering and a number of privately held OFS companies
are being positioned for possible flotation. As operators plan
new capital expenditure in a healthier oil price environment,
pricing pressure reduces and order backlogs build up, it seems
unlikely that 2010 will be as quiet for OFS transactions as 2009.
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