Ongoing interest in shale acreage, deals for midstream assets and increased investments from foreign buyers in the U.S. oil and gas industry helped drive U.S. oil and gas mergers and acquisitions (M&A) value to $39 billion in the second quarter of 2011, according to PwC US.
In the second quarter of 2011, there were 51 deals with values greater than $50 million, compared to 61 announced deals totaling $41 billion in the same period last year. While the volume and value of transactions dipped slightly in the second quarter of 2011 when compared to the same period last year, average deal value for deals over $50 million jumped to $765 million in the second quarter 2011, a 14 percent increase over the same period last year when average deal value was $672 million.
"There continues to be steady M&A activity in the oil and gas sector with strong competition for prized assets, which has maintained the deal momentum throughout the first half of the year. The second half of the year has already kicked off with one mega deal announced, and we expect that deal momentum to continue," said Rick Roberge, principal in PwC's energy M&A practice. "Foreign and private equity interest in North American oil and gas assets remains very high and will likely be a driver of ongoing activity."
Foreign buyers announced 18 deals valued at over $50 million or more in the second quarter of 2011, which contributed $36.2 billion or 72 percent of total deal value, versus 27 deals valued at $24.2 billion in the same period last year.
For deals valued at over $50 million, there were 11 midstream deals that accounted for $19.9 billion, or 51 percent of total deal value, compared to six deals worth $3.4 billion in the same period last year. Transactions in the upstream space led all oil and gas subsectors with 26 deals, or 51 percent of volume in the second quarter.
According to PwC, seven of the top 10 deals by value in the second quarter of 2011 were related to shale plays, including four upstream deals and three transactions in the midstream and oil field services space. For all deals greater than $50 million, there were 10 shale-related transactions totaling $7.5 billion, or 19 percent of total deal value, including two deals involving the Marcellus Shale totaling $2.3 billion.
"Shale-gas assets continue to be very attractive acquisition targets as multinationals look to gain technical know-how and exploit the long-term value and opportunities from rising energy needs," said Steve Haffner, a Pittsburgh-based partner with PwC's energy practice. "At the same time, there is tremendous activity developing around natural gas infrastructure, which is necessary to move the extracted gas to market. The U.S. 'shale gale' continues to attract the attention of global companies."
There were five financial sponsor-backed transactions over $50 million, representing $6.1 billion, or 16 percent of total deal value, compared to 10 financial sponsor deals contributing $6.2 billion during the same period last year. During the first six months of 2011, there were 16 financial sponsor deals contributing $20.6 billion, a whopping 129 percent increase in deal value, compared to the first half of 2010 when there were 15 financial sponsor-backed deals, valued at $9.0 billion.
"With oil prices hovering at $100, private equity funds continue to make a very strong push in the oil and gas sector," added Roberge. "The private equity deal makers, who used to largely play in the midstream space, are now heavily involved in exploration and production (E&P), shale plays, and oil field services and equipment sector. However, along with the great opportunities and rewards of investing in oil and gas, there is still risk in this space – and new entrants need to understand the pitfalls before trying to exploit these possible opportunities."
For deals with values greater than $50 million, there were 18 corporate transactions totaling $26.8 billion or 69 percent of total second quarter deal value, compared to 22 deals that accounted for $25.9 billion in deal value in the same period last year. Thirty-three asset deals for a combined total of $12.2 billion were announced in the second quarter of 2011, versus 39 deals totaling $15.1 billion in the same period last year. However, when comparing the first six months of 2011 to the first half of 2010, the number of corporate transactions increased by three deals to 35 transactions, while total corporate deal value jumped 26 percent to $59.7 billion in 2011 from $47.6 billion in 2010.
Another potential driver for M&A activity is the desire from some oil companies to sell assets and break apart key lines of business, according to PwC.
"We believe that another factor to keep a close eye on throughout the year, which may add to the already robust M&A activity we're seeing, is the trend of integrated oil companies looking at the various options to unlock shareholder value through separating their E&P businesses," said Roberge. "While this trend could be a very positive driver of M&A activity, these are highly complex transactions with potential consequences around tax considerations, valuations and financial reporting. Companies should consider the risk with these types of transactions as every potential scenario needs to be thoroughly and diligently evaluated to succeed."
PwC's Oil & Gas M&A analysis is a quarterly report of announced U.S. transactions with value greater than $50 million analyzed by PwC using transaction data from John S. Herold, Inc.
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