Widespread uncertainty, triggered by volatile commodity prices and events in the Gulf of Mexico, caused energy companies and dealmakers to become increasingly cautious in 2010, forcing them to take a closer look at their business portfolios and reassess their growth and transaction strategies. As a result, there are a number of valuable key takeaways from 2010 that provide a roadmap for our industry moving into 2011 and beyond.

Now that the vast recession has passed, as has the fear of a double-dip, we have seen a steady increase in companies focused on reorganizing their portfolios in order to maximize the returns on capital already deployed, and as a method to raise capital to continue their development efforts. As a result of concentrating on reordering their portfolios, we saw a majority of deal activity this year being driven by asset divestitures and operations no longer considered to be core to their traditional businesses. Upstream asset-focused deals in the third quarter, for example, comprised 71% of deal volume and 57% of value.

While we expect these types of transactions to continue, it is important to note that they are always complicated. At the PwC (PricewaterhouseCoopers LLP) transactions services practice, we work with energy companies every day with these types of deals, making sure they’re mindful of the risks involved so that they can better understand their targets of acquisition in order to enhance value for shareholders and to avoid value destruction by overlooking hidden deal risks.

Despite choppy equity markets, the first nine months of 2010 showed a healthy level of deal activity, with more than 140 announced deals (with reported value greater than $50 million) that totaled more than $100 billion in total deal value. This represents a whopping 101% increase in volume and a 187% increase in value by comparison to the mere 70 deals and $34.9 billion in the first three quarters of 2009, according to a quarterly report of announced U.S. transactions analyzed by PwC using transaction data from John S. Herold Inc. And, because many hesitated to “pull the trigger” on transactions in the last two years, there is still a significant backlog of deals in the pipeline waiting to come to fruition – causing immense pent-up demand for deals to get done. So one thing is certain: there is – and continues to be – a clear appetite for oil and gas deals.

Looking forward, energy companies are planning ahead to execute on business strategies that focus on what they do best. In the deal world, energy companies and strategic financial buyers both agree: it is time to get back on track and get some high-quality deals done.

Deal makers are looking to do transactions for sound, strategic reasons with the goal of increasing operational efficiency and enhancing shareholder value. However, at the same time, companies have become more risk aversive and are spending more time to ensure that the proper due diligence has been conducted. Increased scrutiny on risk has spread beyond just exploration and processing companies in the Gulf of Mexico, as companies in the offshore supply chain – from drillers to equipment manufacturers – are thinking long and hard about whether they are well-equipped to take on the uncertainties.

So finally, after two years, dealmakers in the energy sector can be hopeful – albeit cautiously – that the remainder of the year will experience increased activity, and that momentum will carry over into 2011. Today we are seeing steady deal flow among corporates in this market space, and financial sponsors are starting to emerge again. This all bodes very well for the influx in transactions. Couple that with the fact that there is a significant backlog of deals in the pipeline, and we are confident that we are coming into one of the longest, most significant cycles for transactions in recent times.

Michael Collier
Partner
Houston Transaction Services group of PwC US

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