With natural gas prices hitting a 10-year low this year, U.S. oil and gas companies have shifted their focus and added more profitable liquid-rich unconventional plays to their portfolios, leading to a dramatic increase in the number and total value of asset mergers and acquisitions (M&A) in the third quarter of 2012, according to PwC US.
Thirty-four asset deals with a total deal value of $31.4 billion were announced in the quarter. The total value is 131% higher than in the year-ago period and asset deals by themselves accounted for 93%, or nine of the top 10 mega deals valued at $1 billion or more, said PwC's Rick Roberge, principal in the energy M&A practice. Roberge discussed the latest findings with NGI.
"The third quarter had 10 mega deals, which were dominated by upstream asset transactions as oil and gas companies pursued oily plays due to natural gas prices continuing to remain depressed," said Roberge. "What we saw in the third quarter are companies hunting for more profitable pure oil assets to satisfy the demand of all stakeholders involved. Asset transactions offer the opportunity to specifically target those types of properties."
ExxonMobil Corp.'s announcement earlier this month that it would pay $3.1 billion to buy Canadian unconventional producer Celtic Exploration Ltd. indicates that more big M&A deals may be on the way, Roberge said (see (see NGI, Oct. 22).
"I think the large companies still are under-invested in all of North America, in U.S. and Canadian shale, with more [opportunities] probably in Canada because it's more remote and more difficult in getting [oil and gas] to market...I think...we'll continue to see IOCs [international oil companies] and foreigners invest in Canadian shale and oilsands and U.S. shale...
"All of the sudden, the best prizes in the world are in Canada and the U.S., which easily is the best environment to do business. The big guys for years looked overseas because the prizes weren't here. Now some great prizes are here, so I think they will refocus back in North America."
PwC's Oil & Gas M&A analysis is done every quarter on announced U.S. transactions valued at more than $50 million. The transactions are analyzed using transaction data from IHS Herold.
From July through September, a total of 39 oil and gas deals had values of more than $50 million, accounting for $33.7 billion in deal value, a slight dip from the 44 deals a year ago and a decline in total deal value from $41.1 billion. Compared with 2Q2012, deal volume dropped from the 51 transactions but total deal value increased by $4.1 billion, with average deal size jumping almost by half to $864 million.
For transactions valued at more than $50 million, the upstream was hot, making up more than half (54%) of activity, with 21 deals that accounted for $18.7 billion, or 55% of total quarterly value. Nine midstream deals contributed $11.1 billion. According to PwC, midstream processing transactions jumped in the latest period because more liquids are being extracted in the shale plays and companies are thinking through "various scenarios that may pay out with exports."
In deals related to shale plays, 16 transactions in the latest period totaled $11.7 billion, versus 18 in 3Q2011 with total value of $33.1 billion. PwC found that one of the biggest deals in quarter was one transaction by Chesapeake Energy Corp. in the Utica Shale worth $600 million, which was part of a $6.9 billion divestment that included packages of leaseholds in the Permian Basin, as well as a midstream sale (see NGI, Sept. 17).
"At the current commodity prices, the Utica Shale remains an attractive prospect because of its higher liquids content, which more companies are shifting toward in today's economic environment," said Steve Haffner, a Pittsburgh-based partner with PwC's energy practice. "However, the Utica Shale and Marcellus Shale are still relatively immature shale plays in their early stages and should natural gas prices rise in the short term, we believe there could be a lot more M&A activity in both formations."
The most active shale plays for M&A with values higher than $50 million were the oily Bakken in North Dakota, which had six deals with a total value of $4.4 billion, followed by the Eagle Ford Shale in Texas with three deals representing $658 million.
The volume of financial sponsor-backed transactions valued at more than $50 million increased by one from a year ago to seven transactions that totaled $5.3 billion. There were 32 strategic deals that contributed $28.4 billion, compared to the 38 deals worth a total of $37.3 billion during the third quarter of 2011.
Master limited partnership (MLP) transactions make up nearly 20% of the total 2012 deal activity to date with 24 transactions, "marking an upward trend" of MLP involvement over the past two years. MLPs represented 15.6% of total deal activity in 2010 and 18.4% in 2011.
"There's a whole new thirst out there for high-yield products, and that's what MLPs offer and financing is readily available," said Roberge. "We're seeing a lot of large MLPs doing deals, and we're seeing a a lot of new MLPs coming into the market" through initial public offerings (IPO) or "via private equity backing, [which is]waiting for the right moment to do an IPO. It's a very popular sector, offering yields of 5% and 10% when Treasuries are so much lower...With all of the capital expenditure required to develop the shale plays, it's perfect asset for the MLP sector."
Five deals with total value of $7.4 billion were announced for Gulf of Mexico prospects, marking "at least" a two-and-a-half year high in deal value in the region, noted Roberge.
"There's a lot of money in the Gulf," he said. "The first thing we saw was a great lease sale...That was the first indication the big guys were back." In last June's Central Gulf of Mexico lease sale Statoil Gulf of Mexico LLC offered $157.1 million for a Mississippi Canyon deepwater block, the highest offer for any prospect in 30 years (see NGI, June 25). "The rig count now is back up to where it was, so those are two big positives," Roberge said, referring to the slowdown following the deepwater moratorium. "M&A is probably the third thing. Now we are seeing a good uptick, only six or seven deals, but M&A now creeping up.
"I still think it's an area for larger companies because it's more expensive to do business there. But some people thought it was only for the big IOCs, but I still think the large independents will operate in the Gulf. The prizes are fantastic, the price you get for product is Louisiana light, which is Brent pricing. It's a good place to do business. It's more costly, there are more regulations, but no doubt, the Gulf is where business will tick up."
Five corporate transactions were valued at more than $50 million in 3Q2012, with a total deal value of $2.3 billion, compared with 10 corporate deals representing $27.5 billion in 3Q2011.
Foreign buyers also announced four M&A transactions that contributed $4 billion in 3Q2012, versus nine deals valued at $17.6 billion a year ago. Five downstream transactions in the quarter added $1.7 billion, while oilfield services contributed four deals worth $2.2 billion.
"I certainly think, no doubt, that the shale plays are too exciting for foreign companies not to be involved," said Roberge. "Although a lot of them have done deals, they still don't have a sense of position in U.S. shale. There's certainly room for further positions for foreign companies, and I think you'll see that..."
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