Recent issues and trends in oil and gas M&A
Despite a number of headwinds (including Middle East unrest and an uncertain economic recovery) M&A activity in the oil and gas sector has been relatively robust. Deal activity has been driven by strong demand from China, India and Korea in particular. In a competitive M&A environment having a good understanding of market practice and new developments is key. In this article, I outline a number of issues and trends in oil and gas M&A (focusing on asset transactions rather than corporate takeovers).
Auctions remain the prevailing method by which assets are brought to market, which indicates strong demand. Sellers are attracted to the auction process because it gives them meaningful insight into the market value of their assets and creates competitive tension which in turn enhances value. Buyers naturally seek to obtain negotiating exclusivity, but this is uncommon, and if given it is later in the auction process and is not usually accompanied by cost cover. However, recent examples of negotiating exclusivity have been found in the downstream, where the M&A market dynamics have tilted in favour of buyers.
Asset swaps and share consideration remain uncommon; accordingly cash is the predominant form of consideration. Financing conditions (whether equity or debt) are a rarity, particularly in the upstream. If a potential buyer needs to raise acquisition finance then in order to remain competitive it will need to demonstrate funding certainty. Arranging funding adds to the legal complexity of the transaction, especially in the cross-border context where lenders will often need to familiarise themselves with foreign legal regimes. The increased deal complexity increases execution risk and has the potential to elongate the M&A process, which puts the financed buyer at a distinct disadvantage. Vendor financing (where a buyer's payment obligation is merely deferred, rather than being contingent on other events) is not a regular feature of oil and gas M&A, although Essar's recent acquisition of Shell's Stanlow refinery involved vendor financing, which illustrates the current downstream M&A market favouring buyers.
Understandably the economic climate has seen sellers seeking greater deal certainty. This has resulted in an increase in the payment of deposits at signing, typically being forfeited if completion does not occur due to buyer default. When given, a 10% deposit is the norm, although we have seen examples in excess of 25%.
Consideration which is contingent on future events or performance has also featured recently, including in the Reliance Industries/BP deal which provided for future performance payments of up to US$1.8 billion depending on successful exploration and development of commercial discoveries. Perenco's acquisition of BP's Wytch Farm assets included a US$55m contingent consideration payable on submission of the Beacon field development plan and oil prices. When negotiating such provisions parties need to take care to ensure that the payment trigger events are clear and not capable of being gamed or frustrated by the paying party and that the parties have access to the information they require in order to protect their respective positions.
Material adverse change ("MAC") clauses have become more common in recent years but would not, at least in English law deals, be regarded as market standard. In a competitive M&A market buyers could be putting themselves at a disadvantage by insisting on a MAC clause as it undermines deal certainty. If buyers need the protection of a MAC clause they would be well advised to try and tailor it specifically to the important aspects of their deal and to set a clear materiality level. When interpreting general MAC clauses the courts have stated that a party seeking to invoke one will need to clear a high hurdle and that will involve demonstrating a significant and long lasting adverse event.
The UK Bribery Act (which comes into force on 1 July), and in particular the new corporate offence of 'failing to prevent bribery' has also impacted M&A in the oil and gas sector. Corporates are paying closer attention than ever to bribery and corruption issues in due diligence and in relation to warranty protection. Where parties are entering into joint ventures, terms dealing with implementing best practice anti-bribery procedures and training are receiving a lot of attention.
As global demand for oil and gas continues unabated, companies in the sector are engaged in a keenly contested cross-border battle for access to reserves. Having the ability execute cross-border deals robustly and efficiently by understanding current market practice constitutes a competitive advantage and may be the edge a buyer needs to secure an asset.
Allen & Overy is a leading global law firm with 36 offices in 26 countries. John Geraghty is a corporate partner with Allen & Overy and is based in London. John focuses on M&A and joint ventures in the energy sector. Mr Geraghty can be contacted on +44 203 088 4004 or by email at firstname.lastname@example.org