Dealmaking volumes in the U.S. oil and natural gas industry hit their highest first quarter levels in more than 10 years on activity in the upstream sector and because of heightened foreign interest, PwC US reported Wednesday.

However, the total value of the deals in the three months dipped sequentially as operators divested smaller, noncore assets, a trend expected to continue through the year. For instance, in 1Q2014, five mega deals represented $10.1 billion, versus eight worth $19.7 billion in 1Q2013.

“The first three months of 2014 represented a historic first quarter across the board, led by deal activity in the upstream sector, including in the Gulf of Mexico and interest from foreign players,” said PwC’s Doug Meier, U.S. energy sector deals leader. “Divestitures continue to be a major source of deal activity, but we are seeing smaller deals taking place; larger portfolio adjustments have already been made.

“Smaller deals are also happening in the oilfield services sector as a result of companies selectively looking to fill in the white space by adding assets that can increase productivity and reduce costs. We’re working with companies to analyze the deals that are on the table to improve overall business operations.”

PwC’s Oil & Gas M&A analysis is a quarterly report of announced U.S. transactions with values of more than $50 million analyzed using transaction data from IHS Herold. The PwC analysis is comparable with other recent U.S. M&A findings by PLS Inc. and Derrick Petroleum Services (see Daily GPI, April 17). Similar findings also were reported by Evaluate Energy (see Daily GPI, April 3).

Between January and March, PwC tracked a total of 43 oil and gas deals with values of more than $50 million, accounting for a total of $19.8 billion. In 1Q2013, 41 deals were made. Sequentially, however, deal volumes in 1Q2014 declined by 23% from the 56 transactions. Total deal value in 1Q2014 also fell sequentially by more than half (54%).

Deal activity in the Gulf of Mexico represented five transactions worth $3.9 billion, compared to one deal worth $100 million in the fourth quarter. Upstream activity accounted for almost two-thirds (63%) of the dealmaking in the first period on 27 transactions ($14.2 billion), or 73% of total quarterly value. Four midstream deals contributed $1.3 billion, a 91% decline year/year and a 350% increase in volumes.

“Foreign buyers announced 12 deals in the first quarter of 2014, which contributed $8.3 billion, or 42% of total deal value, versus 10 deals valued at $4.3 billion during the same period last year, representing a 92% increase in deal value,” the PwC survey said. “On a sequential basis, the number of total deals remained the same as total deal value increased 72%.”

For transactions valued at more than $50 million, asset deals dominated in the first quarter with 36 representing 84% of total volumes. Values reached $13.2 billion (67%) in the quarter. Seven corporate transactions totaled $6.5 billion.

According to PwC, 17 unconventional deals valued at more than $50 million were made in the first quarter for a total of $46.2 billion, or 31% of values. In the upstream sector, unconventional deals represented 14 transactions and accounted for $5.7 billion, or 29% of total upstream value. Two midstream unconventional-related deals represented $210 million, a drop from the six worth $7.7 billion in the year-ago period.

“First quarter shale deal activity was on par with what we anticipated as we see the continued shift toward unconventionals,” said Houston-based PwC partner John Brady. “A third of total deal value was related to shale plays in the first three months of the year, indicating the ongoing attractiveness of capitalizing on the long-term prospects for shale gas.

“Unconventionals will continue to play a large part in deal activity going forward, as will finding opportunities for reducing cycle times and increasing productivity through new technologies and processes to increase speed and efficiency.”

The most active unconventional play with values worth more than $50 million was the Eagle Ford Shale, which had five deals worth $3.0 billion, followed by the Bakken Shale (three deals worth $863 million) and Permian Basin, also with three deals totaling $276 million. The Utica Shale generated only one transaction, while the Niobrara formation contributed one worth $180 million.

In the latest period, master limited partnerships were involved in 11 transactions, representing about 27% of the activity, consistent with recent levels. Financial investors also continued to show interest with with two transactions totaling $1.9 billion, a 230% jump in deal value year/year.

“Although financial investor deal activity was low during the quarter, we’re still seeing continued interest from these players, particularly in the upstream and Gulf of Mexico as they’re looking to capitalize on divested assets from corporates,” said PwC’s Rob McCeney, U.S. energy and infrastructure deals partner.