Quarterly market highlights, Spring 2011

Transaction Trends
Joint ventures and divestitures: focus on oil and gas

Strategic planning considerations

LjYfkY[lagfk ha[c mh$ Zml gad Yf\ gas sector faces more regulation and competition
Uncertainty, risk, regulation, vigilance these are some of the watchwords for the energy industry in l`] oYc] g^ l`] fm[d]Yj [jakak af BYhYf$ mfj]kl af l`] Ea\\d] =Ykl$ l`] ?md^ g^ E]pa[g gad khadd Yf\ l`] ogjd\oa\] [Ydd ^gj [d]Yf l][`fgdg_a]k& Af l`] [geaf_ egfl`k$ gad Yf\ _Yk [gehYfa]k Yj] ]ph][l]\ lg face: increased regulatory safety measures and their cost impact; the potential shifting of investment YoYq ^jge l`] `a_`]kl%[gkl g^^k`gj] Yj]Yk3 af\mkljq [gfkgda\Ylagf$ af[dm\af_ e]j_]jk$ Y[imakalagfk Yf\ divestments; an increase in joint ventures to mitigate risk, liability and increased insurance levels; and Yf Y[[]d]jYl]\ ljYfkalagf ^jge gad Yf\ _Yk lg gl`]j ]f]j_q kgmj[]k&
Last years vigorous deal activity will continue in 2011. Oil and gas merger and acquisition activity was strong in 2010, with [j]\al eYjc]lk gh]faf_$ Za_ gad ]paf_ alk fYf[aYd klj]f_l` Yf\ :H ]p[]]\af_ alk khadd%j]dYl]\ \an]klalmj] lYj_]lk& LglYd _dgZYd af\mkljq transaction value topped US$266 billion, up 33% from 2009; the number of deals went up 13%; and deal value rose strongly in each of the four industry segments, with total upstream transaction value j]Y[`af_ Y j][gj\ `a_`& LjYfkY[lagf Y[lanalq ak ]ph][l]\ lg Z] kaeadYjdq Zjakc l`ak q]Yj& Upstream joint ventures take off. Independent players in the [YhalYd%afl]fkan] _Yk af\mkljq Z]_Yf hYjlf]jaf_ egj] na_gjgmkdq oal` eYbgjk Yk l`] j][]kkagf \]]h]f]\ af *((0& L`] dYkl )0 months saw a huge proliferation of joint ventures, notes Deborah :q]jk$ =jfkl  Qgmf_ DDHk 9e]ja[Yk Gad  ?Yk LYp D]Y\]j k]] [`Yjl gf hY_]k ,%-!& Bgafl n]flmj]k Yj] _gaf_ lg Z] ]plj]e]dq Y[lan] af l`] f]pl q]Yj Yk o]dd& L`]j] oadd Z] Y dgl g^ [geh]lalagf ^gj hjgb][lk lg [ge] gfdaf]$ Zml fgl Ydd Yj] _gaf_ lg kmjnan]& Some projects will not move forward, and those that do may not f][]kkYjadq Z] l`] Za__]kl gf]k& Consolidations loom downstream. In the wake of the oil spill, the prospect of greater regulation and oversight will slow down the process for getting permits for drilling, leaving many smaller hdYq]jk oal` ^]o]j ghlagfk lg _]f]jYl] j]n]fm]& L`]q eYq Z] ^gj[]\ lg e]j_] oal` Za__]j hdYq]jk gj \jadd af gl`]j dg[Ylagfk& K]n]jYd [gehYfa]k l`Yl Zmadl daim]]\ fYlmjYd _Yk DF?! j][]anaf_ l]jeafYdk km[` Yk ;`]fa]j] =f]j_q Yj] f\af_ l`]ek]dn]k oal`

deals

]p[]kk [YhY[alq Yf\ Yj] ]nYdmYlaf_ ]phgjl markets, partnerships and other strategic ghlagfk& ;`]njgf Yf\ alk hYjlf]jk$ o`a[` af[dm\] =ppgfEgZad Yf\ JgqYd <ml[` K`]dd$ Yj] ]phYf\af_ l`]aj ?gj_gf DF? hjgb][l af 9mkljYdaY$ [YhalYdaraf_ gf _jgoaf_ 9kaYf \]eYf\& L`] \ak[gn]jq g^ eYbgj gad \]hgkalk af :jYrad Yf\ k`Yd] _Yk af ;YfY\Y oadd lja__]j egj] af\mkljq k`Yc]gmlk& Oil shale activity increases. L`] hYkl )0 egfl`k `Yn] k]]f Y ka_fa[Yfl jYeh%mh af gad [gehYfa]k hdYff]\ afn]kle]flk af mf[gfn]flagfYd gad hdYqk& >gj gad ]pljY[lagf$ eYbgjk km[` Yk ;gfg[gH`addahk$ EYjYl`gf Gad Yf\ @]kk$ Yk o]dd Yk af\]h]f\]flk dac] =G? J]kgmj[]k$ ]ph][l lg mk] l`] [gkl%]^^][lan] `q\jYmda[ ^jY[lmjaf_ ^jY[caf_! e]l`g\k that have been successful in boosting fYlmjYd _Yk hjg\m[lagf& Hjg\m[]jk oadd ]phdgal hdYqk km[` Yk l`] daima\k%ja[` =Y_d] >gj\ af L]pYk3 Fgjl` <YcglYk :Ycc]f K`Yd]$ o`a[` ]pl]f\k aflg EgflYfY Yf\ Y[jgkk the Canadian border into Saskatchewan; Yf\ Yf ]e]j_af_ k`Yd] hdYq [Ydd]\ FagZjYjY$ o`a[` kljY\\d]k ;gdgjY\g Yf\ Oqgeaf_& FgjoYqk KlYlgad Yf\ ;YfY\Yk LYdakeYf have formed a joint venture to develop =Y_d] >gj\ Y[j]Y_]& Af EYj[` *())$ =klgfaYk klYl] hgo]j je$ =]kla =f]j_aY$ Zgm_`l Y eYbgj MK gad k`Yd] hdYq]j$ MlY`k Gad K`Yd] =phdgjYlagf ;gehYfq$ oal` l`] intent to acquire a strategic partner in the \]n]dghe]fl h`Yk]& L`] eYaf ^Y[lgj dac]dq to inhibit the projected growth in shale gas hjg\m[lagf ak f]o ]fnajgfe]flYd d]_akdYlagf& Af hYjla[mdYj$ j]_mdYlgjk Yf\ hgda[q%eYc]jk are concerned about possible threats to

North American oil and gas M&A transactions ]p[dm\]k ?dgZYd <an]jka]\ ljYfkY[lagfk!
300

<]Ydk oal` nYdm] 6 )(E <]Ydk oal` nYdm] 4 )(E Deals without reported value

*-(

200

)-(

100

-(

Joint ventures surge in 2010

80

60 61

40

20

Source: IHS Harold, Inc.

05 2Q 05 3Q 05 4Q 05 1Q 06 2Q 06 3Q 06 4Q 06 1Q 07 2Q 07 3Q 07 4Q 07 1Q 08 2Q 08 3Q 08 4Q 08 1Q 09 2Q 09 3Q 09 4Q 09 1Q 10 2Q 10 3Q 10 4Q 10
Source: IHS Harold, Inc.

1Q

FmeZ]j g^ bgafl n]flmj]k

2009 2010 1Q 2011

33 30 25 17 12 3 4 6 1 11

15

US

Canada

Other

Total

local water supplies and public health as a result of hydraulic fracturing, and the M&K& =fnajgfe]flYd Hjgl][lagf 9_]f[q ak klm\qaf_ alk aehY[l& L`] afmp g^ 9kaYf [gehYfa]k [gflafm]k& L`] hYkl q]Yj kYo Y \jYeYla[ mhla[c af l`] fmeZ]j g^ 9kaYf [gehYfa]k afn]klaf_ af Fgjl` 9e]ja[Yf ]f]j_q hjgb][lk& O`Yl o] are seeing are new entrants that are not your classic international oil companies l`]q Yj] [gehYfa]k ^jge 9kaY l`Yl eYq fgl `Yn] l`] ]ph]ja]f[] gj l`] ]ph]jlak]$ Zml l`]q Yj] ljqaf_ lg _Yaf l`Yl ]ph]jlak] Yf\ eYqZ] ]phgjl al kge]o`]j] ]dk]$ kYqk :q]jk& Af *()($ hmZda[ Yf\ fYlagfYd hdYq]jk from countries such as China, India and South Korea invested a total ofUS$17 billion in energy ventures the majority of l`]e bgafl n]flmj]k af l`] MK Yf\ ;YfY\Y& International oil companies (IOCs) bump up investment in China. Deal values for most of the big IOCs are not reported, Zml kmh]j eYbgjk km[` Yk :H$ K`]dd Yf\ =ppgfEgZad Ydd `Yn] j]faf_ Yf\'gj h]ljg[`]ea[Yd bgafl n]flmj] BN! hjgb][lk mf\]j oYq$ Yf\ KYm\a 9jYe[g `Yk bmkl Yffgmf[]\ Yfgl`]j j]faf_ BN& K`]dd `Yk had some recent success with shale gas ]phdgjYlagf af ;`afY Yf\ ]ph][lk lg egn] ^gjoYj\ af Y Za_ oYq& K]n]jYd g^ l`] gl`]j AG;k$ fglYZdq ;gfg[gH`addahk$ Yj] Z][geaf_ af[j]Ykaf_dq afngdn]\ oal` ]phdgjYlagf Yf\ hjg\m[lagf af g^^k`gj] ;`afY&

North American oil and gas M&A transactions ]p[dm\]k ?dgZYd <an]jka]\ ljYfkY[lagfk!
$70

Upstream Fgf%mhklj]Ye

$60

deal value: US$ billion

-(

$40

$30

$20

$10

$0

09

09 4Q

4Q

3Q

4Q

2Q

3Q

1Q

2Q

1Q

4Q

3Q

1Q

2Q

4Q

3Q

Source: IHS Harold, Inc.

Asset churn increases in Russia and the former Soviet Union. Deal activity in these regions appears vigorous but is largely opaque; transactions are mostly internal, although ;`af]k] Yf\ Af\aYf [gehYfa]k `Yn] eY\] kge] afn]kle]flk& L`]j] ak$ `go]n]j$ _j]Yl \]eYf\ ^gj f]o ]phdgjYlagf hjgb][lk af JmkkaY lg k][mj] gad Yf\ _Yk hjg\m[lagf d]n]dk af l`] h]jag\ Y^l]j *(*-& Mflad j][]fldq$ AG;k o]j] fgl Y\eall]\ lg \]n]dgh Yfq f]o kmZklYflaYd ]d\$ Zml af ]Yjdq *())$ JmkkaYf gad [gehYfq Jgkf]^l Yffgmf[]\ hdYfk lg k]l mh BNk oal` ;`]njgf$ :H Yf\ =ppgfEgZad lg \]n]dgh ]d\k af l`] 9j[la[ Yf\ :dY[c K]Y j]_agfk& The transition to alternative energy speeds up. Jakaf_ _dgZYd \]eYf\ ^gj ]f]j_q has led both governments and businesses to seek alternative sources of energy and c]q [geeg\ala]k& :ml Yk j]f]oYZd] ]f]j_q ak kladd ]ph]fkan]$ ^gkkad ^m]dk km[` Yk gad Yf\ [gYd oadd j]eYaf Y nalYd hYjl g^ l`] ]f]j_q eap ^gj kge] lae] lg [ge]& ;gfkljm[lagf g^ nuclear power plants is likely to slow or be put on hold in the wake of the nuclear crisis af BYhYf& FYlmjYd _Yk$ Y [d]Yf]j%Zmjfaf_ ^gkkad ^m]d$ ak ]ph][l]\ lg _jgo egj] aehgjlYfl$ k]jnaf_ Yk Y Zja\_] lg Y [d]Yfl][`%ZYk]\ ][gfgeq&

3Q

2Q

2Q

1Q

1Q

1Q 10 2Q 10 3Q 10 4Q 10

06

06

06

09

09

08

06

08

08

08

07

05

05

05

05

07

07

07

Market alerts
L`] f]o BNk2 Y c]q _jgol` kljYl]_q
L`] gad Yf\ _Yk k][lgj ak fg kljYf_]j lg bgafl n]flmj]k& Lg\Yqk BNk$ `go]n]j$ [ge] af kg eYfq k`Yh]k Yf\ kar]k l`Yl al [Yf Z] \a^[mdl lg \][a\] gf l`] ghlaeYd YjjYf_]e]fl& >gj ]pYehd]$ hjanYl] ]imalq partners have come into play several funds are dedicated to the oil and gas industry small independents are partnering with one or many majors, and public and national oil companies from all over l`] ogjd\ Yj] ]fl]jaf_ l`] eYjc]l& 9dd g^^]j ]p[alaf_ [geZafYlagfk g^ j]kgmj[]k$ Ykk]lk$ [YhalYd$ ]ph]jlak] Yf\ dYZgj& L`] ja_`l BN [Yf ghlaear] l`]k] lg k`Yh] Y \qfYea[ _jgol` kljYl]_q& @]j] Yj] kge] important factors to consider:
Determine your objectives. Hafhgafl ]pY[ldq o`Yl qgm oYfl lg Y[[gehdak`& Ak your company growing? Is it divesting? Is it trying to gain new technology? =fl]j Y f]o eYjc]l7 O`a[` hYjlf]j k! can best help you achieve these goals? Make sure you can trust your JV partner(s). BNk Yj] g^l]f [gehd]p$ dgf_%l]je YjjYf_]e]flk& Ljmkl$ therefore, is critical to the success of the j]dYlagfk`ah& L`] ]Yjdq ka_fk g^ o`]l`]j your company and its partners are compatible will be evident during the f]_glaYlagf h`Yk]& Dont overlook the cultural aspects of a JV. ;mdlmj] akfl j]klja[l]\ lg [gmflja]k& <a^^]j]fl [gehYfa]k [Yf Ydkg [dYk` o`]f l`]q [ge] lg_]l`]j& >gj ]pYehd]$ Y kmh]j eYbgj eYq oYfl lg k]l mh Y BN oal` Y em[` keYdd]j [gehYfq gj Y H= je& =Y[` ak _gaf_ lg `Yn] different processes for internal control and reporting requirements, and those are the kinds of things you need to vet so that you are aligned going forward, kYqk <]ZgjY` :q]jk$ =jfkl  Qgmf_ DDHk 9e]ja[Yk Gad  ?Yk LYp D]Y\]j& >a_mj] gml qgmj ]pal kljYl]_q& L`] oil and sector is an unpredictable

of oil and gas companies in the April 2011 Ernst & Young Global ;YhalYd ;gf\]f[] :Yjge]l]j Yj] seriously considering a JV in the next 12 months.

37%

]fnajgfe]fl$ kg al ak aehgjlYfl ^gj BN hYjlf]jk lg Z] hj]hYj]\ oal` Yf ]pal kljYl]_q ja_`l ^jge l`] klYjl& A^ qgm Yj] Y H= investor, maybe you want to back off from your investment in Y _jY\mYd oYq$ kYqk :q]jk& Gj eYqZ] qgm oYfl lg \g Yf AHG$ and if that happens, how do you participate in it if there is a big nYdm] [j]Ylagf7 9dd g^ l`gk] l`af_k f]]\ lg Z] `Yee]j]\ gml kg l`Yl qgm \gfl `Yn] [gfljgn]jkq Ydgf_ l`] oYq gj Yl l`] ]pal& Establish responsibility for governance and oversight. Lg [gfljgd jakc Yf\ ]phgkmj]$ al ak ]kk]flaYd lg [dYja^q o`a[` g^ l`] BN hYjlf]jk oadd gh]jYl] l`] hjgh]jla]k$ o`g `Yk j]khgfkaZadalq ^gj o`Yl$ o`]l`]j Ydd BN hYjlf]jk Yj] ljYfkhYj]fl af j]hgjlaf_ Yf\ hjgna\af_ af^gjeYlagf$ Yf\ `go j]oYj\k Yf\ daYZadala]k Yj] k`Yj]\&

9jjYf_] ]p[dmkan] ja_`lk mh ^jgfl& Al ak hgkkaZd]$ ^gj ]pYehd]$ that development of a resource yields discoveries in adjacent Yj]Yk l`Yl Yj] fgl af[dm\]\ af l`] hjgh]jla]k gja_afYddq \]f]\ af l`] BN& 9fla[ahYl] km[` ]n]flk Yf\ af[dm\] Yfq Y[[]kk ja_`lk af qgmj [gfljY[lmYd YjjYf_]e]fl& Do your due diligence. Lj]Yl Y BN Yk qgm ogmd\ Y \an]klalmj] gj Y khaf%g^^& Al ak Y\nakYZd] lg [gf\m[l Y daima\alq YfYdqkak gf qgmj BN hYjlf]j$ j]k]Yj[` l`] eYfY_]e]fl l]Ye Yf\ eYc] kmj] qgm `Yn] Y[[]kk lg l`] af^gjeYlagf qgm f]]\ ^gj qgmj gof fYf[aYd Yf\ lYp j]hgjlaf_&

F]o dYok oadd Y^^][l gad Yf\ _Yk k][lgj

Proposed federal legislation may have a negative impact on the industry. L`] MK _gn]jfe]flk hjghgk]\ Zm\_]l ^gj k[Yd q]Yj 2012 includes the proposed repeal of certain ^]\]jYd af[ge] lYp af[]flan]k [mjj]fldq YnYadYZd] lg []jlYaf gad Yf\ _Yk [gehYfa]k& Gf ), >]ZjmYjq *())$ l`] GZYeY 9\eafakljYlagf j]d]Yk]\ alk Hjghgk]\ :m\_]l$ which incorporated a number of provisions l`Yl$ a^ ]fY[l]\$ ogmd\ ka_fa[Yfldq Y^^][l l`] gad Yf\ _Yk af\mkljq& Af hYjl$ l`]k] provisions would: j]h]Yd ]ph]fkaf_ g^ aflYf_aZd] \jaddaf_ and development costs repeal percentage depletion for oil and natural gas wells repeal the domestic manufacturing deduction for oil and natural gas companies increase the geological and geophysical YegjlarYlagf h]jag\ ^gj af\]h]f\]fl producers to seven years j]h]Yd l`] ]p[]hlagf lg hYkkan] dgkk limitations for working interests in oil and natural gas properties In addition to provisions that would directly Y^^][l l`] gad Yf\ _Yk af\mkljq$ l`] Hjghgk]\ :m\_]l af[dm\]k []jlYaf hjgnakagfk l`Yl$ if enacted or eliminated, may have a f]_Ylan] aehY[l gf l`] fYf[aYd [gf\alagf and results of the operations of certain oil and gas companies, including, in part, l`] j]afklYl]e]fl g^ l`] Kmh]j^mf\ lYp]k$ j]h]Yd g^ l`] dYkl%af'jkl%gml e]l`g\ g^ Y[[gmflaf_ ^gj afn]flgja]k$ eg\a[Ylagf g^ l`] jmd]k ^gj \mYd%[YhY[alq lYphYq]jk Yf\ []jlYaf gl`]j afl]jfYlagfYd j]^gje e]Ykmj]k& New bonus depreciation provisions aim to spur growth by encouraging capital investment. On 17 December 2010, Hj]ka\]fl GZYeY ka_f]\ aflg dYo @&J& ,0-+$ l`] LYp J]da]^$ Mf]ehdgqe]fl AfkmjYf[] J]Yml`gjarYlagf$ Yf\ BgZ ;j]Ylagf 9[l g^ *()( l`] 9[l!& 9dl`gm_` Y^^][laf_ Ydd af\mklja]k$ l`] 9[l _]f]jYddq ]pl]f\k Yf\ eg\a]k l`] Zgfmk \]hj][aYlagf hjgnakagf mf\]j K][lagf ).0 c! g^ l`] Afl]jfYd J]n]fm] ;g\] g^ )10.$ Yk Ye]f\]\ l`] ;g\]!$ Yf\ hjgna\]k ^gj l`] l]ehgjYjq )(( ]ph]fkaf_ g^ []jlYaf imYda^qaf_ [YhalYd ]ph]f\almj]k& L`]k] hjgnakagfk `Yn] Yf\ oadd [gflafm] lg `Yn] Y ka_fa[Yfl ]^^][l gf l`] [YhalYd%afl]fkan] gad Yf\ _Yk af\mkljq& L`] 9[l Y\\k K][lagf ).0 c! -! lg l`] ;g\]$ mf\]j o`a[` []jlYaf lYphYq]jk eYq imYda^q ^gj Y jkl%q]Yj$ Zgfmk \]hj][aYlagf percentage of 100% effectively allowing aee]\aYl] ]ph]fkaf_ oal` j]kh][l lg imYda]\ hjgh]jlq Y[imaj]\ Zq l`] lYphYq]j Y^l]j 0 K]hl]eZ]j *()( Yf\ Z]^gj] ) BYfmYjq *()*$ Yf\ o`a[` ak hdY[]\ af k]jna[] Zq l`] lYphYq]j Z]^gj] ) BYfmYjq *()* ) BYfmYjq *()+ af l`] case of certain property having longer hjg\m[lagf h]jag\k Yf\ []jlYaf Yaj[jY^l!& L`] 9[l Ydkg ]pl]f\]\ l`] Yhhda[Ylagf g^ l`] -( Zgfmk \]hj][aYlagf YddgoYf[] ^gj []jlYaf hjgh]jla]k& Al ak ]ph][l]\ l`Yl l`] cost recovery incentives relating to bonus depreciation should accelerate plant and equipment purchases in 2011 to take Y\nYflY_] g^ l`] )(( jkl%q]Yj Zgfmk \]hj][aYlagf YddgoYf[]& Gf *1 EYj[` *())$ l`] Afl]jfYd J]n]fm] K]jna[] akkm]\ guidance regarding the application of the )(( Zgfmk \]hj][aYlagf hjgnakagf&

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About Ernst & Young =jfkl  Qgmf_ ak Y _dgZYd d]Y\]j af YkkmjYf[]$ lYp$ ljYfkY[lagf Yf\ Y\nakgjq k]jna[]k& Ogjd\oa\]$ our 141,000 people are united by our shared nYdm]k Yf\ Yf mfoYn]jaf_ [geeale]fl lg imYdalq& We make a difference by helping our people, our clients and our wider communities achieve l`]aj hgl]flaYd& =jfkl  Qgmf_ j]^]jk lg l`] _dgZYd gj_YfarYlagf g^ e]eZ]j ^ajek g^ =jfkl  Qgmf_ ?dgZYd Daeal]\$ ]Y[` g^ o`a[` ak Y k]hYjYl] d]_Yd ]flalq& =jfkl  Qgmf_ ?dgZYd Daeal]\$ Y MC [gehYfq limited by guarantee, does not provide services lg [da]flk& >gj egj] af^gjeYlagf YZgml gmj gj_YfarYlagf$ hd]Yk] nakal ooo&]q&[ge *()) =Q?E Daeal]\& 9dd Ja_`lk J]k]jn]\& =Q? fg& ;=(.1*
L`ak hmZda[Ylagf [gflYafk af^gjeYlagf af kmeeYjq ^gje Yf\ ak l`]j]^gj] afl]f\]\ ^gj _]f]jYd _ma\Yf[] gfdq& Al ak fgl afl]f\]\ lg Z] Y kmZklalml] ^gj \]lYad]\ j]k]Yj[` gj l`] ]p]j[ak] g^ hjg^]kkagfYd bm\_e]fl& F]al`]j =Q?E Daeal]\ fgj Yfq gl`]j e]eZ]j g^ l`] _dgZYd =jfkl  Qgmf_ gj_YfarYlagf [Yf Y[[]hl Yfq j]khgfkaZadalq ^gj loss occasioned to any person acting or refraining from action as Y j]kmdl g^ Yfq eYl]jaYd af l`ak hmZda[Ylagf& Gf Yfq kh][a^a[ eYll]j$ j]^]j]f[] k`gmd\ Z] eY\] lg l`] YhhjghjaYl] Y\nakgj&

>gj egj] af^gjeYlagf$ [gflY[l2 HYmd @Yee]k Americas Divestiture Advisory Services Leader Transaction Advisory Services =jfkl  Qgmf_ DDH +1 312 879 3741 <]ZgjY` :q]jk Transaction Advisory Partner Americas Oil and Gas Tax Sector Leader =jfkl  Qgmf_ DDH #) /)+ /-( 0)+0 =\algj'Ojal]j2 JYeY JYeYkoYea EYfY_af_ =\algj2 Ea[`]dd] @gjf]j