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M&A activity heats up the energy and power sector

With the market’s volatility, ongoing low Brent and crude prices and a vacillating geo-political environment, what lies ahead for M&A in the Energy & Power sector?

Several news articles have surfaced recently detailing speculation that a mega-deal between Exxon Mobil and BP may be in the works. As deal makers debate whether a $100B cash deal is possible and market pundits weigh on whether this record-breaking deal makes strategic sense, it all begs the question about mergers and acquisitions in the energy sector in general.

Current state of M&A

2017 is off to a strong start for the Energy & Power sector in terms of deals activity. The industry has the largest investment in mergers and acquisitions, with volume totaling $140.1B in the first three months of the year. This is 48 percent more than the next closest industry, Materials, yet with 119 fewer actual deals: 826 versus 707, respectively; and 55 percent fewer M&A deals than the most prolific 2017 sector overall: High Technology (1,584 deals), according to the Thomson Reuters Deals Intelligence report.

The 2017 Energy & Power numbers represent a 60 percent increase over the same time frame last year, with many of the top M&A deals in the sector driven by a re-organization of corporate structures and joint ventures. Deals such as Tulsa Oklahoma-based Oneok’s acquisition of a remaining 60 percent interest in Oneok Partners LP for $17B and Canada’s Cenovus Energy’s purchase of the 50 percent interest, which it did not already own, in FCCL Partnership, a producer of crude petroleum and natural gas, from its joint venture partner ConocoPhillips Co for $13.2B. Williams Partners, also of Tulsa, Oklahoma, acquired 100 percent of WPZ GP LLC, the owner and operator of its natural gas pipelines, for $11B.

Figure 1. Worldwide M&A by Target Macro Sector, first quarter 2017

Worldwide M&A by Target Macro Sector, First Quarter 2017
Source: Thomson Reuters Market Deals Intelligence

These are on the heels of the purchase of BG by Royal Dutch Shell for $70.1 billion, which closed in 2016, and last year’s announcement that Sunoco Logistics Partners LP intends to acquire Energy Transfer Partners LP for $51.4 billion.

Figure 2. Top Worldwide Energy & Power M&A deals since 1980

Top Worldwide Energy & Power M&A Deals since 1980
Source: Thomson Reuters Market Deals Intelligence

Momentum continues

Despite the uncertain geo-political environment, continued sagging prices and questions about OPEC’s production output, Thomson Reuters data shows that global deal making activity in the energy sector totaled $608.0B, an increase of 15 percent during full year 2016, and up 5 percent by number of deals. Full year 2016 ranked as the largest annual period for Energy & Power M&A since our records began in 1980. Energy & Power M&A was just one of three sectors to see year-over-year growth during full year 2016, driven by the largest all-time quarter for tie-ups in the sector during the fourth quarter ($253.5B). Most other industries saw double-digit declines as the value of overall worldwide announced M&A deals fell 16 percent during full year 2016.

Figure 3. Worldwide Energy & Power M&A, by quarter, since 2007

Source: Thomson Reuters Market Deals Intelligence

Along with the tie-up between Sunoco Logistics Partners and Energy Transfer Partners, Canada’s Enbridge Inc. announced a $43.1B plan to acquire Spectra Energy Corp, and Baker Hughes received a $31.7B bid from GE Oil & Gas after a proposed $38.5B offer from Halliburton collapsed in May of last year.

Mega deals abound

Energy & Power also had 60 percent more mega deals (valued at $5B or more) in 2016 than 2015, with 27 versus 17 such initiatives, respectively. One-quarter of the worldwide mega deals were from Energy & Power, and it was the only sector to experience increases in both the value and number of deals year-over-year, despite the overall economic environment.

The United States was the most acquisition-focused country with US $328.3B worth of deals, accounting for 42 percent of the total M&A activity. Cross-border M&A deals also fared quite well, accounting for 46 percent of the sector’s annual activity valued at $280.3B.

What lies ahead

While there isn’t a crystal ball to know for certain the outcome of a Exxon Mobil/BP potential merger, or any of the other pending energy-related deals, keeping an eye on industry M&A trends is essential when analyzing the sector. With the market’s volatility, ongoing low Brent and crude prices and a vacillating geo-political environment, the timing could be right for the continued clip of activity seen thus far in 2017.

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