In this article, we review recent factors of the mergers and acquisitions (M&A) landscape within the oil and gas industry.
In gas production, supply has surpassed demand resulting in reduced natural gas prices. Today, it appears the natural gas oversupply is leveling off, but natural gas storage continues to exceed industrial and power demand. Good demand exists for oil properties with prices being much higher than in early 2009. The strong demand for oil is primarily driven by China and emerging markets. Experts predict that crude oil prices are expected to remain firm in the near future and perhaps strengthen in 2011. M&A activity in the exploration and production middle market space hit its peak in 2008 with the global economic recession causing downward activity since then. However, as oil prices have rebounded and the credit markets have eased, confidence has returned to the exploration and production M&A space.
Unconventional gas resources are the primary driver in North American M&A activity, as well as significant oil plays. The primary buyers have been the majors and integrated oil & gas companies as well as new private equity players and significant activity from foreign investors. Recent resource play transactions are heavily weighted towards shale production, such as gas from the Marcellus shale in Pennsylvania, Eagle Ford and Haynesville shale in Texas and oil in the Bakken shale in North Dakota. This has resulted in a very active oil and gas related M&A market in the US.
In oil field services, looking at stock prices over the last six years, companies operating in the oil services sector (OSX) have done much better than the S&P indices as a whole, resulting in higher overall returns. While OSX has been more volatile than the S&P 500 index, it has outperformed the S&P 500 index significantly during the past five years. Capital expansion and strong revenue growth is expected for the major companies in this sector-much higher than the economy as a whole. These factors support attractive M&A activity in the oil services sector.
Future Outlook
Many experts in the oil and gas area use rig count to judge expectations. Statistics show that North America currently is a good place to be operating. As of November 2010, the North American rig count surged 54 percent over 2009 and comprised 65 percent of the worldwide rig count. The number of oil rigs worldwide increased 30 percent during 2009, compared to a 17 percent increase in the number of rigs seeking gas.
While no one can predict with certainty the future outlook of the oil and gas industry, the factors illustrated in this article support an attractive future in the oil and gas industry related to M&A activity. At Eide Bailly, we are optimistic for our clients operating in this space and welcome the opportunity to assist with financial reporting, tax planning and business consulting related to acquisitions, entity combinations and business expansion.
For additional information, go to the U.S. Energy Information Administration at www.eia.gov.
