Commodities » Energy

Upstream oil and gas review (March 2010)

By PSQ Analytics

Review of the past quarter

While crude oil prices rebounded from a 52-week low of USD34.98 per bbl in February 2009 to USD80 per bbl in December 2009, since then, prices have hovered around the USD70 level. Natural gas price touched a 52-week low of USD1.88 per mmbtu in September 2009, but had recovered strongly, averaging USD5.34 and USD5.82 per mmbtu in December 2009 and January 2010, before dropping back to average USD5.32 in February 2010. The upstream industry has seen a rise in drilling activity and investment in every quarter since 2Q 09. Meanwhile, according to data provided by Baker Hughes, Inc., rig counts also increased in January 2010 over the previous month. Total active rigs involved in discovering oil and gas worldwide totalled 2,773 in January 2010, compared to 2,509 in December 2009; however, this figure remains below the January 2009 count of 2,974.

Transactions and developments

Reflecting improved economic conditions, investment and M&A activity in the upstream industry has grown in each quarter since 2Q 09. The total number of transactions (including M&A deals, private placements and IPOs) totalled 251 in 1Q 09 which increased to 458, 493 and 558 in 2Q 09, 3Q 09 and 4Q 09, respectively. To date in 2010, 256 deals have been closed Source: CapitalIQ. On 01 March 2010, Noble Energy, Inc. closed its purchase of the US oil and gas assets of Petro-Canada Resources, Inc. and Suncor Energy, Inc. for USD494 mn. This deal is expected to add approximately 10,000 barrels of oil equivalent per day to the company's daily production base.

Outlook

Our outlook for oil and gas prices remains broadly unchanged, with oil prices still expected to rise. Oil prices have hovered around USD70 per bbl for the past three months. This relative stability at an economically viable level should lead to further growth in activity and investment. Emerging markets are expected to be the prime drivers of industry growth, including China which, despite a rise in a key interest rate and a hike in its central bank reserve requirements, is still expected to grow rapidly and see a sharp rise in demand for energy during 2010.

Tougher environmental regulations around the world, and particularly in the US, are expected to increase demand for natural gas, which is a cleaner and cheaper source of energy than other fossil fuels such as coal, lifting its market share. However, in our view, oversupply conditions rule out any significant natural gas price increase over the near-to-medium term.