M&A activity in general, and in the energy sector in
particular, was relatively mute in the last year. Activity picked up towards the end of the year
with BP's sale of its 51 per cent stake in its Indian solar power
business to Tata, Repsol's acquisition of stakes in oil and gas
fields in Mississippi, EDF's announcement to acquire Edison, and
earlier this year Eon's planned acquisition of a stake in Brazil's
MPX Energia. Despite that, 2011 overall was still a dull year for
It is anticipated however for activity to dramatically pickup in
2012. The recent move by Cove Energy to put itself up for sale for
an estimated $1bn has sparked renewed expectations for a much
active year. The argument is that
due to the limited ability of the smaller companies to raise
adequate capital (especially given current circumstances in the
capital markets) to finance their expansion and the development of
new fields, they are increasingly turning to the bigger players
with much deeper pockets and/or better ability to raise capital to
acquire them and invest in their growth opportunities.
However, before one looks at the affordability or not of these
acquirers to buy the smaller E&P companies or consolidate by
merging with their peers , the fundamental questions that will
determine whether we see increasing M&A activity are: Are
current valuations right? Are the assets or shares fairly priced?
Are they value-creating investments? Basically, is the price right?
Oil prices have remained above $100 per barrel for awhile now and
this has been reflected in the strong valuations of these companies
and their assets. Perhaps this is partly the reason why deals have
been so limited in the past year.
The next question is: How are these valuations expected to trend
in the near future? One can argue that oil prices are most likely
going to stay relatively high at above $100 per barrel, as Saudi
Arabia recently confirmed that it thinks a reasonable price range
for oil is at around the $100 mark. Further, with the potential
crisis with Iran and its nuclear ambitions, which could lead to
serious supply constraints, it would not be a surprise for oil
prices to trend higher, making valuations much higher and possible
acquisitions quite expensive.
Therefore, despite the anticipated increase in interest by the
bigger oil companies to acquire and/or consolidate and their
relative ability (compared to the smaller companies) to raise
capital, there is the likelihood that these acquisitions might
simply be too expensive and not value-creating investments. As a
result, we might continue to see weak activity in M&A deals in
the energy sector.
 Merger to provide
$100m boost for advisers, Financial Times, February 2, 2012.
 Cove Energy: an
M&A catalyst?, Financial Times, January 5, 2012.