2012 Deal Activity in the Energy Markets is “Energized”

There have been no reports that Apple is using its immense war chest to bid on El Paso Corp.’s E&P assets.  Deal activity, however, has been robust for the first quarter of 2012 in the oil and gas industries.  The biggest deals so far this year include:

  • The highly expected completion of an estimated U.S. $7.2 billion sale of El Paso’s upstream assets to a consortium of private equity investors;
  • Pembina Pipeline’s purchase of Provident Energy Ltd. for approximately U.S. $3.2 billion, increasing Pembina’s natural gas services capabilities;
  • Apache’s acquisition of Cordillera Energy Partners III LLC for U.S. $2.9 billion, increasing Apache’s hydraulic fracturing capabilities primarily in the Anadarko Basin;
  • Devon Energy’s U.S. $2.2 billion sale of one-third of Devon’s interest in five North American venture shale plays to Sinopec International Petroleum & Production Corporation;
  • SandRidge Energy’s purchase of Dynamic Offshore Resources LLC for U.S. $1.4 billion, increasing SandRidge’s oil assets; and
  • ConocoPhillips’ sale of its Vietnam business unit to a subsidiary of Perenco for approximately U.S. $1.3 billion.

So what is driving this activity and what trends can be observed?

A standoff with Iran over its nuclear plan and the devastation that war has inflicted on Libya and Iraq have led to a renewed focus on drilling projects in other parts of the world.  Unrest in oil exporters Sudan and Yemen has had a similar effect.  There is, however, substantial lead time that must be invested in developing new projects.  Consolidations in nations that are non-traditional exporters are occurring as a result.  For example, URS Corporation recently announced that its acquisition of Flint Energy Services, Ltd. for U.S. $1.3 billion will “significantly expand URS’ presence in fast-growing segments of North American oil and gas industry, particularly in unconventional oil and gas extraction.”

Even if OPEC and other traditional exporters resume normal operations at some point this year, production in non-OPEC but still oil-rich countries are clearly taking on a greater focus.  Again, companies with an existing foothold in these countries whether it is in Mexico, Canada, Brazil or Russia, are seemingly ahead of the growth cycle.

In addition, with the European debt crisis no longer making top headlines, alternative financing options are becoming more plentiful for deal making in numerous industries, including oil and gas. As a result of greater financing alternatives, transactions will likely become more competitively bid than they were in 2011 and should even return to 2010 levels.  Financial buyers that bought at market lows are also likely to try to take profits on investments as markets improve. Both price competition and the increase in investment opportunities should lead to a higher number of completed transactions.

Oilfield service companies are also trying to stay ahead of the curve by marketing the appeal of their safe, accurate and cost-efficient technologies, which will all become buzz words as the U.S. continues to revise its national energy policy.  Developers of corrosion-resistant alloys, which allow drillers to reduce equipment loss during the drilling process, are one example of this movement. Other examples include specialty parts manufacturers, gas storage operators, providers of innovative detection and extraction services and deepwater engineering and design firms.  All seem well positioned as takeover targets.

When combined with an improving global economic outlook, 2012 deal activity in the energy markets is just as the name implies, energized.