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Midstream Deals Gain Favor over Shale

U.S. natural gas and oil merger and acquisition (M&A) deals over the past two years primarily were driven by shale and unconventional activity, but that changed in the second quarter as midstream deals, particularly gathering and processing targets, accounted for more than half (55%) of the total deals, according to PwC US.

Midstream transaction values totaled $15.8 billion in 2Q2012, which was nearly 200% higher than in the same period of 2011, the quarterly PwC Oil & Gas M&A Analysis found. In addition, three of the five largest transactions were midstream-focused, based on announced domestic transactions valued at more than $50 million. PwC compiled the report using data supplied by IHS Herold.

"The second quarter experienced a softening of oil prices and, combined with the continued lows of natural gas prices and the global economic uncertainty, many oil and gas companies started to pull back from new investments in the upstream sector," said PwC's Rick Roberge, a principal in the energy M&A practice.

"However, dealmakers put their capital to work in the midstream sector where they focused on building out the infrastructure to transport, process and store the oil and natural gas extracted from shale plays they previously acquired. We believe that this infrastructure-related buildout will continue to be a focus for the remainder of 2012 and into 2013."

Deal volume in the latest quarter increased significantly from the first three months of this year when 33 deals were announced; total values in the latest period also rose from $25.6 billion (see NGI, May 7). According to PwC, 16 deals valued at more than $50 million related to shale plays and represented a total of $7.5 billion in deal value. Included in the shale-related deals were two transactions involving the Marcellus Shale totaling $1.6 billion and one Utica Shale deal that contributed $194 million.

"Deal activity in both the Marcellus Shale and Utica Shale continued to tail off as a result of the persistent low price of natural gas," said PwC's Steve Haffner, a Pittsburgh-based partner with the energy practice. "Over the past few quarters, shale assets were supported by strong pricing of natural gas liquids [NGL], but in the second quarter the market saw a drop in NGL pricing, impacting deal activity even further. Now the focus is on the midstream sector."

Total quarterly transactions valued at more than $50 million reached $28.5 billion, compared with $23.1 in 2Q2011. Deal volume fell slightly to 50 from 55 year/year. Average deal size also jumped in the period by 35% to $569 million from $421 million, "driven by seven 'mega' deals (deals with values of $1 billion or more)," PwC said.

For transactions valued at more than $50 million, 14 were midstream-related. Upstream transaction accounted for 58% percent of activity with 29 deals, but only accounted for $9.3 billion of total deal value.

According to PwC, "upstream deals skewed toward oil-focused targets instead of gas-focused ones, with 12 oil deals compared to four gas deals -- a historical high over the last 10 quarters that was likely driven by the differences in commodity prices."

Four downstream deals contributed $2.2 billion in value during the quarter, while oilfield services added three deals worth an estimated $1.2 billion.

There were 13 corporate transactions valued at more than $50 million in 2Q2012, with a total deal value of $17 billion, or 60% of quarterly value. Thirty-seven asset deals contributed $11.4 billion. However, both the number and total deal value of asset transactions declined from 40 deals that represented $12.4 billion in 2Q2011. Foreign buyers announced three transactions in 2Q2012, which contributed $438 million, versus 11 deals valued at $6.4 billion during the same period last year.

For deals valued at more than $50 million, the volume of financial sponsor-backed transactions doubled in the period to 10 from a year earlier. Private equity represented $5.7 billion in total deal value. Also in the first six months of 2012, master limited partnerships and private equity acquirers accounted for almost 95% of conventional natural gas deal value.

"Private equity activity is expanding in all sectors of the energy industry as financial sponsors continue to look for entry points to position themselves to participate in the tremendous expected growth in the U.S. energy space," said Roberge. "They also have the ability to exercise the patience necessary to invest in the natural gas business at the bottom of the cycle -- a luxury public companies do not have.

"They've also been active on the sell-side looking to monetize earlier investments, especially in the midstream and oilfield services space. Whether it's financial sponsors exiting or corporates looking to divest certain noncore assets, sellers in this market need to be well prepared and ready to provide deeper financial and operational details for a competitive buyer landscape that includes more private equity firms than ever."

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