A&D Activity in Energy Sector Set to Increase in 2010

Oil & Gas IQ

The coming year could see acquisitions and divestiture (A&D) activity increase within the oil and gas sector, as businesses look to consolidate and restructure their assets.

Adam Waterous, global head of investment banking at Scotia Capital, recently told Bloomberg that he expected companies to increase acquisitions in the first half of 2010, particularly in Asia.

'Exciting Year' for A&D

"The first half specifically will be a very active period," Waterous said. "There are a number of large companies that have made decisions to rationalise their businesses."

Bloomberg's 2010 Mergers and Acquisitions (M&A) Outlook survey suggests that the energy industry will see the most A&D activity this year.

Bender Consulting also predicted that A&D activity would increase in 2010.

"We expect 2010 to be an exciting year in the energy sector," said Jonathan Dison, managing director and partner at Bender Consulting.

The company predicted that major A&D trends for the oil and gas sector this year would include acquisition of proven reserves, a "shrink to grow" mentality within downstream, prioritising the reduction of risk and carbon legislation leading to increased activity on the upstream side.

Big energy companies will be looking to buy reserves in 2010, with natural gas and US-based reserves being particularly attractive in terms of A&D activity, Bender Consulting predicted.

"Climate legislation will continue to be a key issue for all the energy companies—both upstream and downstream," he continued.

Exxon Deal

"Additionally, we expect to see acquisitions similar to Exxon [Mobil's] purchase of XTO Energy as the year unfolds," Dison added.

Exxon signed a deal to buy XTO in December last year for around $30 billion (£18.5 billion) in stock in an A&D move which propelled the US energy giant to the forefront of North America's natural gas industry.

The deal is subject to approval from XTO's shareholders and is expected to be closed in the second quarter of 2010. If the transaction is completed, the deal will be Exxon's largest since it bought Mobil Corp in 1999.

Once the deal is complete, ExxonMobil plans to create a new upstream organisation to manage global development and production of unconventional gas resources. It said that this would enable "the rapid development and deployment of technologies and operating practices to increase production and maximise resource value."

This new organisation will be located in Fort Worth, Texas, in XTO's current offices.

"XTO's strengths, together with ExxonMobil's advanced research and development and operational capabilities, global scale and financial capacity, should enable development of additional supplies of unconventional oil and gas resources, benefiting consumers both here in the United States and around the world," said Rex Tillerson, chairman and chief executive officer of ExxonMobil Corporation.

He added that the deal was part of an ongoing evaluation of "timely investment opportunities" for ExxonMobil.

Hostile Takeovers and Asset Swaps

The move follows A&D activity by Centrica, which undertook a hostile takeover of North Sea oil and gas production firm Venture last year. The Aberdeen-based firm conceded defeat in August and recommended that shareholders accept the £1.3 billion offer from Centrica.

Stakeholders were warned that if they did not agree to the deal, they risked being left with a minority interest in an unlisted company. But Venture still believed that the offer of 845p per share undervalued its prospects.

Centrica launched its bid for Venture with the aim of increasing its gas production and reducing its dependence on volatile wholesale markets.

"The deal sees us continuing our investment in the North Sea, which is good news for our customers and shareholders," said Sam Laidlaw chief executive of Centrica. "It further reduces our overall exposure to volatile movements in wholesale gas prices and helps secure UK energy supplies."

Also active in terms of A&D activity relating to the North Sea last year were BG Group and BP. The two companies completed an asset swap in September, with BG acquiring BP's entire equity in the Everest, Lomond and Armada fields, as well as part of the stake in the Erskine field operated by Chevron.

In return, BG Group transferred all of its interests in a number of North Sea holdings, including the BP-operated Wollaston and Whittle fields within the Easington Catchment Area and the Amethyst field, which is also run by BP.