Strategic investors and foreign buyers continue to press for deals in U.S. unconventional fields, but higher prices have pushed private equity (PE) momentarily to the sidelines, according to PwC US.

Both merger and acquisition (M&A) deal volume and value rose in 1Q2013, with 39 deals worth $27 billion, versus 34 transactions worth $25.7 billion, according to PwC’s Oil & Gas M&A analysis. The quarterly report on announced domestic transactions valued at more than $50 million is compiled by PwC using data from IHS Herold.

According to PwC, 18 deals valued at $50 million-plus related to shale plays in 1Q2013, with a total of $16.3 billion, or 60% of all the deals’ total value. In the upstream sector, shale deals represented 11 transactions and accounted for $5 billion, or 40% of total upstream deal value.

Included in the shale-related deals early this year were three transactions involving the Marcellus totaling $882 million and two in the Utica that contributed $283 million. Compared with the same period of 2012, Marcellus deal volume was flat, and total values decreased from $3 billion. Utica deal activity has doubled; there was one transaction a year ago worth $112 million.

“The main story in the first quarter of the year continues to be about shale,” said PwC’s Steve Haffner, a Pittsburgh-based energy practice partner. “We’re seeing interest in both the Marcellus and Utica, and we don’t expect to see that enthusiasm dissipate anytime soon. While that interest hasn’t translated to a dramatic increase in the volume and value of shale deals in the region, potential buyers are seeking the right opportunities to establish their footprint in the area — or to expand — and that includes both private equity and foreign buyers.”

The most active M&A shale plays in the first quarter, with values exceeding $50 million, include the Eagle Ford in Texas, with five transactions representing $5.1 billion, followed by the Marcellus, the Utica and the Bakken in North Dakota, which recorded one $513 million deal. Overall, expected “seasonality” led to a 48% drop in transactions in 1Q2013 from the final three months of 2012, when there were 75 deals worth $56 billion. PwC’s Rick Roberge, a principal in the energy deals practice, spoke with NGI’s Shale Daily on Tuesday.

“I don’t think there was anything major that was surprising in the first quarter, to the extent that M&A in January is typically a slow month, and December is typically a hot month, and it was exacerbated by the so-called fiscal cliff. January was very slow, but activity picked up and valuations are higher…

“As for shale, it’s still a very big part of the M&A landscape in North America, no doubt. Still over half of the upstream activity is taking place in what you would call the unconventional plays.”

Foreign buyers, he said, “are still looking for opportunities to expand in U.S. shale plays and are extremely active in upstream prospects — and they’re willing to acquire those assets at a premium. At the same time, while private equity activity in the oil and gas industry recently hit an all-time high, the increase in asset valuations has caused them to move to the sidelines so far this year. However, we expect private equity involvement to pick up, in line with our outlook.”

Last year Roberge and his colleagues said they expected foreign investments and PE investments to continue to be higher in unconventional plays (see Shale Daily, Feb. 10, 2012).

PE “typically requires returns, which are in excess of what a large company would require,” Roberge said. “The cost of capital is higher, and investors demand higher returns.” PE needs “something special about a transaction that they can see on a three-, four-, five-year note to make the kind of returns they need. But you can’t start out with a high purchase price, whether it’s seven or eight times cash flow on upstream properties…If you start with a high price, that makes it difficult. PE is not going away, and there is lots of money, but they’ll be happy to wait.”

Land valuations today “are a little high, but there’s a lot of optimism” for more deals this year, he said. More activity, he said, is likely once oil prices fall below $90/bbl West Texas Intermediate.

Also on the watch list: natural gas properties.

“The first quarter saw a divergence in buyer-seller price expectations around gas assets, as natural gas prices bumped up from recent historical low levels. These higher valuations for gas assets, combined with continued high valuations in the sweet spots of the liquid-rich shale plays, were a major contributor to PE firms largely sitting out this quarter, but it’s critically important for PE and strategics alike to be ready when an opportunity surfaces and prices are more favorable, as buyers will be lining up…”

It would not be a surprise to see some of the medium and smaller gas-focused companies snapped up by big producers this year, Roberge said. Gas-focused producers are struggling to fund their capital programs, and majors and large independents could offer compelling offers.

Foreign buyers announced nine transactions from January to the end of March, which contributed $4.1 billion, or 15%, of the total values, versus six deals valued at $5.9 billion a year ago. On a sequential basis, the number of total deals was the same, but values in the final three months of 2012 were 28.1% higher.

PE deal activity was low, with only two transactions in 1Q2013 with values of surpassing $50 million, representing a total deal value of $576 million, versus a year ago when seven financial sponsor-backed deals were worth $13 billion. Additionally, 34 strategic deals contributed $26.4 billion and made up 98% of total value early this year.

Thirty-five total asset transactions, representing 90% of the volume, contributed $17.2 billion, a 30% increase in volumes from the 27 deals recorded a year earlier, but a slight decline from the $18.2 billion in total deal value. Four corporate transactions contributed $9.8 billion in 1Q2013, versus seven a year ago, but the value increased from $7.4 billion.

For deals valued at more than $50 million, 23 were in the upstream, representing $12.6 billion, or 47%, of quarterly values. Eleven oil deals in the upstream were announced, versus five natural gas transactions. There also were 11 midstream deals that contributed $10 billion, a 120% jump from the five worth a total of $3.2 billion a year ago. Three downstream deals added $3.9 billion, while oilfield services contributed two deals worth $465 million in the latest period.

Also of note in 1Q2013, master limited partnerships (MLPs) were involved in eight transactions, representing more than 20% of total activity “and continuing the trend of MLP involvement in deal transactions, as MLPs represented 20.6% of total deal activity in 2012,” PwC said.