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Oil and Gas Industry Deals Remain Flat This Year, Deloitte Says

The oil and gas industry continues to narrow its focus on development this year, heeding the call of investors who expect maximum returns from existing portfolios and taking advantage of higher commodity prices, especially in North America, according to the Deloitte Center for Energy Solutions.

Sustainable growth and cost containment held the industry back from mergers and acquisitions (M&A) through the first half of 2014 in a trend that remained mostly unchanged from last year (see Daily GPI, Feb. 11), according to the firm's midyear report.

Between 2010 and 2012, M&A activity surged, particularly in the U.S. onshore, as the industry scrambled to expand acreage and secure drilling rights in unconventional shale plays across the country. But after grabbing all the leasehold they could, incurring more debt and more projects, exploration and production (E&P) companies are focused on ensuring the right mix of properties and economics in their portfolios.

"Faced with these organic growth opportunities, buyers are weighing each potential new acquisition with respect to their current asset mix in order to extract the maximum value from each deal," said Deloitte Vice Chairman John England, who leads the U.S. oil and gas practice. "As a result, deals are being done more slowly."

A total of 299 transactions were completed in the first six months of 2014, one less than the year-ago period. The value of deals in the first half of this year, though, rose by nearly $40 billion globally to $141 billion. Although commodity prices have been volatile this year, they have also been higher, which Deloitte said is likely deterring asset sales.

The U.S. and Canada remained the center of M&A activity, accounting for 61% of all transactions, which was down slightly from 67% last year. While a below-average deal count persisted in the latter half of 2013, Deloitte said the decline has started to slow and may begin to reverse itself in the second half of 2014.

"You're going to see companies selling assets to make sure they are investing the capital that they have in their most important projects," said Melinda Yee, a partner in Deloitte's M&A transaction services.

The firm also noted that the future prospect of increased demand for liquefied natural gas "could encourage deal activity this year as more producers decide to increase their gas exposure."

While the number of upstream sector deals has increased 13% to 231 transactions this year, Deloitte said the midstream sector has seen the most dramatic slowdown. Much of the demand for new pipelines and processing facilities has suppressed midstream acquisition activity.

Deals in the oilfield services sector slowed during the first half of this year too, as cost containment efforts in the E&P sector put pressure on margins. The number of deals fell to 37 this year, compared to 57 in 2013. Deal value increased to $14 billion, up 22%. But two of the largest transactions were in Europe, while the $2.9 billion merger of C&J Energy Services Inc. and Nabors Industries Ltd. was the largest in North America (see Shale Daily, June 26).

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