Consolidation pressure remains a force in reshaping global energy priorities

NEW YORK, Nov. 5, 2001 – Political and economic uncertainty could jeopardize pending and potential mergers and acquisitions for the global energy industry, according to the Transaction Services team in the Global Energy and Utilities group at PricewaterhouseCooopers.

However, the industry remains under pressure to consolidate in order to lower costs and increase access to production.

Rick Roberge, a Transaction Services partner, said, “The energy industry faces enormous pressure to lower costs, increase efficiencies, and increase shareholder returns. But, at the same time, the industry is inevitably sensitive to larger geopolitical issues. In order for deals to happen, we need some stability. Right now, both stock prices and commodity prices are extremely volatile, which makes pricing hard to do, especially in stock-for-stock deals.

“Even with recent events, however, the factors that have driven this industry over the past ten years – particularly the need to get bigger and become global players – will continue to be important going forward. But M&A activity will only pick up when stability returns.”

Roberge said the industry’s M&A planners need to consider the following factors, at least in the short term:

* Commodity price outlook remains mixed. OPEC is committed to a $22-$25 per barrel price at current production levels. However, should the conflict in Afghanistan spread to other areas of the Middle East & threaten supply, all bets are off. With natural gas, given very high storage levels heading into winter, it appears any forecast north of $3 per million cubic feet would require a very cold winter.

* The strong are getting stronger and the weak are getting weaker. Top tier companies with cash in place have room to do deals even in this difficult environment, and they will continue to look at the top second-tier companies that lack critical mass to do business globally at all levels. Look for continued consolidation of second-tier refiners in the U.S. as refining increasingly becomes a game for the big players. Also, the bottom tier of the oil & gas industry is being hurt badly by volatility in commodity prices, limiting access to capital and making them possible acquisition targets for top tier companies.

* The easy deals have been done. With most of the major energy companies in Canada and the UK already acquired, the most promising opportunities for U.S. companies in the future may well be state-owned companies in Africa, South America, Russia and the Middle East. But those transactions have longer lead times and are inherently more difficult to complete, a less than perfect fit in a short-term shareholder world.

“Looking at it in one way,” Roberge said, “the global energy industry is already far more efficient, in large part because of the effects of consolidation at all levels. However, in the current environment, it is also clear that the economics of the marketplace may not be as powerful, in the short term, as competing political forces. Any additional terrorist acts in the near future will add to the uncertainty and ultimately, increase volatility – which stifles M&A activity.”

The Transaction Services group of PricewaterhouseCoopers (http://www.pwcglobal.com/ustransactionservices) offers a deal process that helps clients bid smarter, close faster, and realize profits sooner on mergers, acquisitions, sales and financing transactions.

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