Global oil and gas merger and acquisition will see continued weakness in 2012 in view of uncertain economic conditions playing a truant to the sentiments. The later part of 2011 witnessed slower activities and this is not likely to be reversed in the next two quarters at least. The industry is also going through a phase of separating refineries and exploration and production businesses. The companies are resorting to this module due to profit margins getting hurt by weaker demand for gasoline and other petroleum products.
The International Energy Agency has also cut its demand outlook recently citing weakness in international economic conditions. The agency is reducing the demand outlook for the sixth time in a row. The IEA's action follows after the recent downgrades that result weak demands for oil products in 2012.
The IEA's cut in forecast also comes in the wake of International Monetary Fund cutting down its projections for global economic to expand at 3.3 percent in 2012 from its earlier estimation of 4 percent upside.
Ernst & Young expects rationalization to be the top agenda for 2012 given the weak refining margin in Europe as well as North America. The financial institution also sees prospective suitors to pitch in for storage facilities operators who are offering worldwide connectivity and trading.
Similarly, oilfield services companies are likely to extend their increased deal activities in 2012 in view of their globalization and consolidation. Ernst & Young remains positive about the outlook for this sector.
The year 2011 started off with a high note in M&A for the oil and gas continuing the 2010 trend. But the momentum failed to continue as one or other economic indicators dragged down the sentiments. Though the value of the deals were lower than 2010 level, the number deals struck in 2011 was higher than 2010 indicating consolidation among the small and medium players in the industry.
The number of deals that witnessed $1 billion plus value dropped to 38 upstream deals in 2011 from 55 in 2010, according to Ernst & Young data. More than 1,322 deals involving oil and gas industry were recorded in 2011 indicating 5 percent upside from 2010. The total deals were worth about $317 billion, which is 7 percent lower than $341 billion registered in 2010. Ernst & Young believes that this was due to fewer larger deals involving more than $1 billion.
In the upstream segment, there were about 957 transactions in 2011, ten deals higher than 947 transactions recorded in 2010. The biggest deal was Kinder Morgan's $38 billion purchase of El Paso, whereas Petrobras' $42.5 billion was the largest deal in 2010.
However, the U.S. bucked the global trend. The total oil and gas deal value witnessed 30 percent year-over-year upside, whereas volume grew 14 percent. Interestingly, U.S. M&A in oil and gas represented 50 percent of the worldwide deal in 2011 in terms of value. Volume-wise, the largest economy in the world accounted for 45 percent.
The downstream sector in the U.S. will continue to have its weakness given the tough prevailing conditions in view of more assets available for sale than buyers. This is actually dragging down the pricing. The upstream sector witnessed modest results with steady deal activities and may continue its trend.
The economic ambiguity in the current scenario might hamper M&A activities in the oil and gas sector in 2012. But this also provides ample opportunities for big companies, who are flush with funds, to take advantage of the situation and involve in more M&A for a greater slice of pie in the years to come.