Jim: Relative to other industries where deal volume was low, we have seen plenty of activity, especially during the first eight months of 2008 when oil prices were strong; energy was one sector where banks felt comfortable lending money. Certainly, the abrupt change in prices means some of those factors are no longer in play, but that only means business plans need to be adjusted according to price. This in turn could lead to the disposal of assets or businesses and at least a moderate level of M&A activity.

How are the difficulties in the credit market affecting deal- making activity in energy?

Trevear: If you think about the O&G market and those organizations that have upstream businesses, the rapid decline in prices has caused some tightening of acquisition programs, particularly for companies spending billions of dollars on exploration and production projects which, for some players, are credit financed. Some organizations have made strategic bets on the price of oil remaining near or above $100 a barrel, so it will be interesting to see how these entities will service their debt.

The expectation is that the Obama administration will pursue a variety of initiatives, such as carbon legislation, in order to reduce the use of fossil fuels. What do you anticipate will happen and how will this impact M&A activity? Trevear: One scenario—and there is limited clarity here—is that carbon-heavy businesses will pay a penalty for maintaining these types of assets, either through a cap and trade system or a carbon tax. From an M&A perspective, this may result in companies buying carbon-friendly assets that align with their strategic plan to reduce their overall cost of footprint.

Jim: The overhang of threatened carbon legislation has been there for some time and has affected transaction activity, because no one knows exactly what will happen legislatively. Clarity around regulation might result in a better understanding of values and increase activity. Some companies arealready redeploying based on their view of what the future will bring and are moving toward some of these green initiatives. This could result in both selling and acquiring operations to realign their business portfolio. Keep in mind, however, that while U.S. policy may move toward reducing reliance on carbon-based fuels, demand continues to increase for oil, gas, and coal from regions experiencing greater economic growth than the United States, such as China, India and other Asian Pacific countries. So we could still experience growth in global consumption, despite the decline in demand here in the United States.

Will the federal government's proposed increased spending on infrastructure improvements affect M&A activity?

Jim: Part of what the new Administration has talked about is spending money on the electrical grid, which may have a lot of advantages and is intended, in part, to facilitate various alternative energy projects. Developing suitable sites for wind projects is an example. It's great to build wind farms, but we have to find a way to connect them to the grid and some of the best locations for wind farms may not be optimal for a connection. For instance, there's a lot of activity in west Texas with wind farms, but there isn't adequate infrastructure to move that electricity to population areas. This needs to be corrected and done on a more national scale. While this doesn't necessarily translate to immediate M&A activity, it could incentivize companies to move in new strategic directions. Infrastructure-related acquisitions have been one of the bright spots of the last year, as they have less revenue volatility and can be more easily financed in this unstable market.

Trevear: I see a similarity to the tech boom of the 1990s, where you had large entities adding to their toolkits by purchasing smaller players. In the energy space, we're seeing significant alternative-energy startup activity where companies find themselves in a position to collaborate or be acquired once they reach commercial maturity. We are still in the very early stages; this is going to be an interesting phenomenon.

Is there more outbound or inbound investment being made in the United States?

Jim: Energy is a global business and activity continues to be both outbound and inbound. Some inbound activity has slowed down as the credit crisis has spread worldwide. Longer term, I expect to see increased inbound activity, particularly for O&G service companies as the United States has the valuable technology that developing regions require. When we talk about resources, however, U.S. reserves are pretty mature and I expect we'll continue to see more interest from U.S. companies seeking to access reserves elsewhere. Trevear: Much depends on the size of the play and the regulatory environment, which is involved because we're dealing with foreign entities, and in some cases, governments, that own these assets. I think we're likely to see an increased trend of joint ventures, but we have to be extremely sensitive to the political and regulatory environments.

What kind of deal activity might we see from the multinationals and large national oil companies and will they be competing for the same assets?

Jim: In the past few years, National Oil Companies (NOCs) have become a much stronger force in the global energy industry and have been actively competing with the Integrated Oil Companies (IOCs) for acquisitions. Just to step back: The majority of oil reserves globally are owned by national interests and to a large extent those reserves are not on the market. That means there are relatively few opportunities for reserves. What has changed in the last decade is that NOCs are in pursuit of reserves when they become available and do compete head-to-head with the IOCs. We've seen quite a bit of that, but more recently there's also been talk of IOCs trying to joint venture with NOCs in pursuit of some of those reserves. There are prominent examples of NOCs not successfully exploiting their own reserves simply because they don't have the expertise that the IOCs have. It is becoming painfully obvious that some NOCs were able to claim success due to record prices, but now are not able to cope in a low-price environment. So the IOCs may see more opportunities in today's challenging pricing environment.

What do corporate directors of energy companies need to consider when evaluating deals in 2009?

Jim: One main question for management is really how well thought out the acquisition plan is and how thoroughly the target company has been investigated. I've seen too many situations in the industry in the last year or so where companies got sold on an acquisition, but they didn't do the kinds of things they needed to do from a background standpoint to make sure the acquisition was on solid footing, fully understood why the deal made sense, and why the acquisition would still be successful in a range of business and pricing scenarios. Boards need to ensure that management thoroughly understands the target company and has made a true assessment of the strategic direction. Management cannot rely on the assumption that past performance will continue.

Trevear: Evaluate everything through a risk lens. The volatility of oil prices certainly has implications in M&A. Make sure these strategies are vetted through every possible scenario. How does the company manage risk? That is the key message to directors, especially in the environment we're living in today.