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Globe and Mail: Oil and gas deal-making slumped at end of 2006

SHAWN MCCARTHY

Mergers and acquisitions by global oil and gas producers slumped in the second half of last year after a torrid pace in the first half, setting the stage for a “frustrating” 2007, a report from two industry research firms said Thursday.

Fuelled by record cash flow and earnings, global oil companies concluded roughly 280 major upstream transactions, worth $166-billion (U.S.) in 2006, said the report from Houston-based John S. Herold and London-based Harrison Lovegrove & Co. Ltd. That’s the highest transaction value since the mega-merger year of 1998, although the number of deals fell from 302 in 2005.

In a letter to clients, the chief executive officers of the two companies noted that record commodity prices drove M&A activity in the first half of the year, but that the pace of deal-making fell off as both crude oil and natural gas prices fell last fall.

This year “could be a frustrating year for the industry,” wrote Herold CEO Arthur Smith and his counterpart Martin Lovegrove.

They forecast that the industry’s earnings and cash flow will decline from last year’s record levels as costs continue to climb, but commodity prices fail to rise above 2006 levels.

“Early signs are that assets continue to come to the market in abundance, but should commodity prices stay around existing levels, it is almost certain that deal prices will fall against those seen last year.

“Some sales are also likely to be withdrawn as buyers fail to offer prices that match the expectations of sellers.”

They noted that asset values have soared in recent years, with worldwide proved reserves up 34 per cent last year as commodity prices climbed and global companies found themselves in greater competition to acquire assets. A record one-third of acquisitions were undertaken by state-owned national oil companies, notably Norway’s Statoil ASA, Russia’s OAO Gazprom, and several Chinese companies, which spent more than $8.5-billion in the global market.

The M&A review noted that the value of transactions last year was on track to fall, compared with 2005, until the final month, when two mega-deals were announced: Statoil’s $30-billion acquisition of fellow Norwegian Norsk Hydro ASA, and Gazprom’s $7.45-billion acquisition of a majority stake in Russia’s Sakhalin 2 oil and gas project from Royal Dutch Shell PLC and its two Japanese partners.

In Canada, the Herold-Lovegrove report noted that 73 significant transactions were announced last year, worth $32.7-billion. That includes Shell’s $8.7-billion (Canadian) bid for the 22 per cent of Shell Canada Ltd. it does not own, an offer that expires Friday.

Canada also recorded the world’s highest prices for “proved plus probable” reserves, as deals valued such assets at $15.69 (U.S.) per barrel of oil equivalent, up from $6.76 five years ago.

But Canadian figures are skewed by the inclusion of oil sands transactions, in which firms purchase assets with a relatively small “proved plus probable” reserves base, but significant bitumen resources.

Globally, companies focused increasingly on acquiring natural gas reserves, as the development of the liquefied natural gas market transforms a collection of regional markets into a global one. A record 53 per cent of total transactions — and four of the top five by value — involved the acquisition of natural gas assets.

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