Energy price fluctuations present both near-term challenges and interesting opportunities for the oil and gas mergers and acquisitions (M&A) market. As Deloitte Consulting points out in a recently released report, current depressed North American natural gas prices (prices far below the market rates in other continents) will likely continue to attract both domestic and international supermajors that have money to spend on natural gas assets at low prices. Deloitte believes the long-term outlook for US natural gas holds promise, as gas gradually gains domestic market share, and as prospects for LNG exports from the US improve.
The consulting company sees buying interest and E&P activity in liquids-rich shale plays continuing, as well as midstream consolidation and infrastructure investment, as that segment restructures and invests to serve the rapidly changing North American energy landscape. According to Deloitte, a resurgent North American energy market and the investment needs that accompany that resurgence should set the stage for sustained M&A activity over the longer term.
Only nine refining and marketing (R&M) deals took place during the first half of 2012, compared to 12 transactions in the first half of 2011 and 13 during the second half of 2011 (Fig. 1). However, the total value of transactions picked up during this years first half to $10.6 billion, up 36%, when compared to $7.8 billion in the first half of 2011, and several orders of magnitude larger than the $2.6 billion during the second half of 2011.
FIG. 1. Refining and marketing M&A deals
by value and count.
We actually saw a good increase in deal value year over year in this segment, said Roger Ihne, a principal at Deloitte Consulting. This was primarily driven by two large deals that took place outside the US: one in Asia and one in Europe.
One refinery acquisition during this period was notable not for its size but for the industry affiliation of the buyer. A major international airline announced in the second quarter of 2012 that it would buy a Trainer, Pennsylvania, refinery for $180 million. The company intends to upgrade the refinerys capabilities so that it can produce a much higher proportion of jet fuel, giving the airline a source of fuel in a region of the US that has very little jet fuel production, as well as exchanges to allow jet fuel to be supplied throughout other geographic areas.
This is certainly a unique situation that has everyone intrigued both within and outside the industry, said Mr. Ihne.
From integrated to independent.
Ownership within the R&M segment of the energy industry has been transformed over the past decade as large integrated companies have high-graded their portfolios, selling or spinning off their downstream assets to focus on higher-performing upstream operations. Now, over two-thirds of US R&M operations are in the hands of independent rather than integrated companies. Many of these independent operators have benefited over the past two years from rising profits in the US due to advantage-priced crude supplies from Canada and the developing tight oil plays in America, but long-term prospects are more uncertain.
Gasoline demand in the US is down 5% compared to last year, said Mr. Ihne. Long-term demand for refined products in the US is still uncertain due to stricter corporate average fuel economy and renewable fuel standards, as well as future competition from natural gas-based transportation fuels.
However, reduced domestic consumption of gasoline and distillate fuels has largely been offset by exports of refined products from US Gulf Coast refiners to Mexico, South America and Northern Europe. Fig. 2 provides an overview of the net exports of US petroleum products from January 2010 to May 2012.
FIG. 2. Net exports of US petroleum products.
Without export demand, US refiners would likely be challenged to operate near the 85%-plus capacity they reached this year, and could instead be facing increased rationalization of exiting capacity, said Mr. Ihne.
The cloudy regulatory and competitive landscape creates an uncertain environment for many of the newly independent players in this segment.
Refiners now have varying degrees of balance sheet strength, said Trevear Thomas, another Deloitte Consulting analyst. The question is whether that is sustainable long-term, or whether that situation will lead to consolidation.
A crucial issue for refiners located along the Gulf Coast is whether the Keystone pipeline project will be allowed to move forward. Many of the refineries in this region are designed to process heavy, high-sulfur crude oil.
Refining assets in the Gulf are some of the most sophisticated in the world, said Mr. Ihne. They can process heavy crude from Canada and the new tight oil supplied from various US plays, but unless refiners gain access to that oil, we will have assets in the US that have a comparative economic advantage to the rest of the worldbut, nonetheless will have to rely on higher cost imported crude from elsewhere. HP