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More than $200 billion in value has been created globally by leading oil and gas players on their M&A transactions during the past several years, largely a result of ?rising oil prices, according to a Wood Mackenzie study.


The U.K.-based energy-research and -consulting firm reviewed the 195 largest upstream oil and gas transactions completed by 38 E&P companies between 2001 and 2006, including by majors, independents, Asian national oil companies (NOCs) and Russian players. The value creation takes into account factors that have both positive and negative effects in the present value, says David Barrowman, Wood Mackenzie vice president, energy consulting, and study-project director.


The results show a $204-billion net value creation on these assets from the time of purchase. This is above the combined total deal value when acquired of $264 billion. The average internal rate of return during the period was about 16%, with returns generally increasing the longer the asset was held.


Rising oil prices had a dominant effect. “Oil prices created about $327 billion of value, clearly significantly more than the overall value created. While many transactions created value on the back of a rising oil price, there were a number of transactions where companies adopted strategies that created value well above that created merely by the oil price,” Barrowman says.


An additional $34 billion was generated through discoveries.


“Transactions done for near-term production or driven by mature specialization tended to create more value than those transactions that were longer term, possibly resource access or driven for exploration reasons.”


Factors that had a negative effect on value creation included changing expectations on assets, cost inflation and tax changes, reducing the overall value creation by $123 billion.


Some elements that destroy value are closely related to oil price. “Even if we deduct those from the decrease due to the oil price, we still find that companies have struggled to attain much value.”


Wood Mackenzie upstream consultant and study-project manager David Parkinson says the linkage between oil prices and costs going up “makes it difficult to disaggregate the two.”


More than 80% of the transactions studied created value during the period. The assets transferred accounted for 84 billion barrels of oil equivalent of reserves, which showed a 14% average growth since acquisition.


Returns for North American deals were lower than those elsewhere, affected largely by the level of competition and the nature of the assets purchased.


Barrowman says North America, and the U.S. in particular, tended to dominate overall spending, highlighting the interest of the industry in this area.


“The above-ground risk is perceived by many to be less than in many other areas of the world. Companies may be willing to accept lower returns in North America because they understand it better and the risks are lower than elsewhere in the world. This pushes returns down.”


Similarly, many North American deals are gas weighted, resulting in lower value creation during the same period due to gas-price weakness, compared with oil ?prices.


“We didn’t see gas prices rise to the same extent as oil prices across the period. Also a lot of deals are done in unconventional assets, and they tend to generate lower returns than conventional oil assets.”
In contrast, Europe showed the highest returns, largely driven by StatoilHydro’s purchase of SDFI.


Deals focused on near-term production generate higher returns than those for longer-term resource access or that are driven by exploration. As a result, average returns for majors lagged behind those of other peer groups as they focus on longer-term opportunity sets and to develop core areas.


Asian NOCs generated consistently high returns. Parkinson says, “They were more inclined to look at areas with above-ground risk so they can get into assets that ?are less competitive in the international industry.”