The strength of U.S. shale plays was a key driver for increased merger and acquisition (M&A) activity in 2010, and will continue to fuel the industry's movement toward upstream assets, according to a report issued by PricewaterhouseCoopers USA (PwC).

M&A activity in the U.S. oil and gas industry outpaced the overall U.S. deal market last year, and the industry fared better than other industries during the economic downturn due to energy companies' "adept skill in managing cash flow," according to PwC. Overall M&A activity in 2010 was boosted by improving economic conditions, stabilizing commodity prices and increased corporate confidence.

"Strong M&A activity in the U.S. oil and gas sector in the past year is indicative of the 'boom and bust' nature of the industry and a paradigm shift of strategy towards shale," said PwC's Michael Collier, U.S. leader of the energy M&A practice. "As U.S. energy companies continue to showcase true know-how in managing cash flow and making sound strategic investments during times of uncertainty and volatility, we expect to continue to see corporates take leadership, while financial sponsors will begin to make their presence known and come off the sidelines to take advantage of increased interest in the sector." PwC expects the energy equipment and services sector to heat up this year "as companies look to bulk up with people and equipment needed to support shale development efforts," he said.

Average deal size was $24.1 billion in 2010, a 141% increase compared with $10 billion in 2009, "largely a reflection of major shale gas investments by non-U.S. oil companies looking to play large in the U.S. 'shale gale,'" PwC said in its report.

The final three months of 2010 saw a total of 49 deals in the oil and gas sector worth a total of $26.9 billion, an increase of 81% in volume and 103% in value compared with 4Q2009 (27 deals with a total value of $13.2 billion), PwC said.

Liquid content shale plays drove the majority of deal activity in 4Q2010 with a total of 84 transactions worth a total of $21.6 billion in the upstream sector. During the same period, the midstream sector contributed 12 deals worth $3.7 billion and the downstream sector added six deals worth $1.2 billion.

There were five deals worth a total of $5.4 billion involving the Marcellus Shale in 4Q2010, according to PwC, which said it expects the industry's interest in the Marcellus to continue as energy players look to it as a domestic source of long-term energy supply. Despite lower natural gas prices in 4Q2010, corporates continue to enter the Marcellus with substantial investments.

"As the climate for business in the Gulf of Mexico continues to remain stagnant due to concerns surrounding the regulatory environment, we expect deal making in connection with the shale plays to outsize deal making in the deepwater Gulf as potential investors assess the still dynamic regulatory climate," Collier said.

Asset transactions drove the majority of activity during the fourth quarter of 2010 with 89 deals and $19.5 billion in total value. Activity in the exploration and production sector reflects an increased level of interest in shale, PwC said.

Major joint ventures in North American unconventional resource plays were a driving force in pushing worldwide M&A activity to a record $107 billion in total asset deal value in 2010, according to preliminary findings by research firm IHS (see Shale Daily, Jan. 6). Unconventional resources represented more than one-third of total worldwide upstream transaction value, or $57 billion, in 2010, according to IHS. Wood Mackenzie recently pegged worldwide upstream M&A activity last year at $117 billion (see Shale Daily, Jan. 27).

The biggest shale-specific transaction completed in 2010 was ExxonMobil Corp.'s $41 billion purchase of XTO Energy Corp., whose shale empire is spread across almost every U.S. play (see Daily GPI, June 28, 2010; Dec. 15, 2009). Chevron Corp. in November said it would pay $4.3 billion to buy Atlas Energy Inc.'s million-acre-plus domestic shale leasehold (see Shale Daily, Nov. 10, 2010).

Other deals in 2010 included Royal Dutch Shell plc's $4.7 billion acquisition of subsidiaries of privately held East Resources Inc. (see Daily GPI, June 1, 2010) and Reliance Industries Ltd.'s $1.7 billion deal to join Atlas Energy in the Marcellus Shale (see Daily GPI, April 12, 2010) and its subsequent $392 million offer to partner with Carrizo Oil & Gas Inc. in the Marcellus (see Daily GPI, Aug. 6, 2010).