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OIL SPILL LEGAL NEWS, Vol. 7, Gulf Oil Spill Likely to Spur Energy Sector Consolidation

07.07.10

Oil Spill Legal News – Update No. 7, July 6, 2010

The economic impact of the Gulf Oil Spill, estimated to have cost BP $2.65 billion as of this writing and rising daily, is likely to be felt for years to come. Ripple effects of the spill will extend far beyond the local economies of the Gulf states. Oil and gas industry analysts expect an increase in consolidation activity among domestic and multinational corporations doing business in the Gulf region.

In May, President Obama announced the creation of a bipartisan National Commission to investigate the Gulf Oil Spill and recommend changes to strengthen existing environmental and safety regulations governing the oil and gas industry. Tougher regulations and safety requirements, along with increased caps on liability, will drive up the cost of offshore exploration and production, with the result that some small to mid-sized companies may choose to exit the region or sell stakes in Gulf assets. Ultimately, drilling in the Gulf may be feasible for only the largest energy companies.

Oil and gas sector mergers and acquisitions have accounted for deals in the amount of $68.8 billion thus far in 2010, or about 8.4% of the total M&A activity across all industries (compared to 5.9% of global M&A during the previous decade), according to a recent Bloomberg report. The pace of consolidations involving companies with Gulf-based operations may slow pending the enactment of new regulations, which could take months or even years to be fully implemented. Analysts expect that the largest players with diversified operations will be able to absorb the financial impact of this period of uncertainty and a more stringent regulatory environment. Smaller operators, unable to bear the increased costs or risks of doing business in the Gulf, may be forced to sell assets or see their valuations fall, rendering them potential takeover targets.

Two of the largest US oil and gas exploration and production companies, Anadarko Petroleum Corporation (NYSE:APC) and Noble Energy, Inc. (NYSE: NBL), have been the subject of speculation that they may elect to shed their deepwater Gulf assets. Deepwater E&P company, Cobalt International Energy, Inc. (NYSE: CIE) and rig contractors, Pride International, Inc. (NYSE: PDE) and Rowan Companies, Inc. (NYSE: RDC) have also been mentioned as attractive M&A candidates since the White House extended the moratorium on U.S. deepwater drilling projects in May. BP, itself, continues to be the subject of takeover speculation among industry commentators, although most analysts discount the likelihood of a play for BP for the foreseeable future, given the company's mammoth size and the uncertainty surrounding the ultimate financial impact of the Gulf Oil Spill to the company.

BP shares, however, have lost more than half their market value since the April 20 explosion aboard the Deepwater Horizon drilling platform, and BP has reportedly approached several sovereign wealth funds about taking a strategic 5 – 10% investment stake in the company to fend off potential takeovers.

The move to consolidate is expected to extend beyond companies engaged in production, drilling and processing of oil and gas resources, and may include oil and gas industry service providers such as equipment and rig maintenance companies, transportation companies, helicopter operators and providers of cleanup and remediation services.

Some industry observers speculate that the negative stigma and increased liability for offshore drilling may divert global investment capital into companies focused on onshore exploration, including natural gas and shale technologies, where initial lofty valuations have been declining to more realistic levels. Others expect to see increased investment in alternative or "green" energy technology companies like solar, wind and bio-fuels, particularly where governments enact policies that support wide-scale development in these areas.

On a local scale, of course, literally thousands of small business owners in the Gulf region have been adversely impacted by the Gulf Oil Spill. The fishing, tourism, retail and shipping industries have been dealt a severe blow, and many small companies may be forced to sell, close or seek protection under bankruptcy laws. A $20 billion claims fund has been established by BP, at the Obama administration's insistence, to aid spill victims, but the local business landscape is evolving each day.

Waller Lansden will continue to monitor events and issues related to the Gulf Oil Spill.  For additional information on mergers and acquisitions, please contact Hunter Rost, or any member of the Waller Lansden corporate and commercial transactions practice at 800-487-6380.

The opinions expressed in this bulletin are intended for general guidance only. They are not intended as recommendations for specific situations. As always, readers should consult a qualified attorney for specific legal guidance.

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