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U.S. Shale Deals Lost Momentum in 3Q, Says Survey

The value of global oil and gas deals reached $85 billion during 3Q2010, but U.S. shale gas deals in the quarter lost the momentum from the first half of the year, according to a survey by Evaluate Energy Inc., which tracks global merger and acquisition (M&A) activity on a daily basis.

"With the Henry Hub benchmark gas price dropping steadily to end below $4, total shale deals during this year's third quarter came in at just $5.8 billion for the quarter, with the majority of this value coming from Canadian shale gas plays," noted Evaluate Energy's GlobalM& A database.

"A flurry of activity in the shale gas sector produced $33.2 billion of deals in the first six months of 2010 as numerous companies across the world clambered to get on board the hottest resource of the year."

However, a lot of shale assets in the United States are "held by small-cap independent companies" that lack the deep pockets of the majors, the survey noted. An "extended period of low U.S. gas prices may put pressure on the industry to move toward further consolidation."

In contrast to low gas prices, the West Texas Intermediate oil price benchmark "has remained above $75/bbl in four successive quarters," noted the survey.

"In the U.S. companies have shifted their focus to assets weighted toward oil in the past few months and this has led to a resurgence in Permian Basin deals during the quarter," said lead M&A analyst Eoin Coyne.

Total deal value in the Permian Basin alone was reported to be $5.4 billion in the quarter, according to a survey issued last week by PLS Inc. in conjunction with its international partner, Derrick Petroleum Services (see Daily GPI, Oct. 6).

Global M&A deals in the last quarter were led by a "massive" $42.5 billion deal between Petrobras, based in Brazil, and Brazil's government, and strategic "reorganizations of assets" by super majors BP plc and ConocoPhillips, according to Evaluate Energy.

In September Petrobras, which also is a big operator in the U.S. Gulf of Mexico, and the Brazilian government reached an agreement in which Petrobras transferred $42.5 billion of stock in exchange for the rights to 5 billion boe of reserves in deepwater areas offshore Brazil. The transaction increased the Brazilian government's voting stock ownership of Petrobras to 64% from 57.5%.

Excluding the Petrobras deal, total deal value in the exploration and production sector still is "slightly higher" than in the first half of 2009 and "far in excess of total deal value in the third quarter of 2009, when the credit crunch was still significantly affecting commodity prices and access to finance," the survey noted.

"Last quarter we saw the biggest volume of exploration and production deals ever," said Evaluate CEO Richard Krijgsman. "We are seeing major structural shifts in the market as publicly quoted and national oil companies vie for reserves, and the M&A market is simply reflecting this trend."

Asset sale programs by BP and ConocoPhillips contributed $15 billion to the total value during the quarter, with BP "keen to raise funds for the [Deepwater] Horizon oil leak payouts and ConocoPhillips looking to improve its balance sheet," said Evaluate Energy.

"BP's divestitures of E&P assets totaled $8.9 billion and included assets in Canada, Colombia, Egypt and the United States. An additional $21 billion of sales are planned which will bring BP's divestitures to their target level of $30 billion.

"The main beneficiary" of BP's asset sell-off in the quarter was Apache Corp., which acquired assets in Canada, United States and Egypt for $7 billion during the quarter. Including deals to acquire Devon Energy Corp.'s Gulf of Mexico shelf assets and the merger with Mariner Energy Inc., Apache this year to date has negotiated $11.9 billion worth of deals, noted the survey.

"ConocoPhillips' divestiture strategy is to raise $10 billion to reduce debt and fund share repurchases," Evaluate Energy noted. "A large portion of this total has already been reached through the divestiture of the company's Syncrude stake to Sinopec. In addition to the planned $10 billion of sales ConocoPhillips reduced their stake in Lukoil from 19.2% to 6.6%."

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