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Foreign Interest in U.S. Oil, NatGas Assets Vanished in 2Q

August 7, 2013
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U.S. oil and natural gas mergers and acquisition activity (M&A) plunged in the second quarter from the first three months of 2012, with divestitures driving activity, according to PwC US.

PwC's Oil & Gas M&A analysis, released on Tuesday, is a quarterly report of announced U.S. transactions with values of more than $50 million that are compiled using transaction data from IHS Herold.

U.S. deal volume fell 26% from a year earlier, while values were down 43%, the analysis found. Between April and June there were 39 deals valued at more than $50 million, which accounted for $17.2 billion in deal value. That compares with 53 deals worth $30.4 billion in 2Q2012, PwC said. On a sequential basis, deal volumes in the latest period dropped by 5%, with deal values diving by 37% year/year.

Two main factors caused a drop in announced deals during quarter, according to PwC U.S. energy transactions and deals chief Doug Meier. "Companies remained focused on the critical task of integrating assets they acquired during 2012, and sellers are bringing deals to the market fully priced,"he said. "However, interest from potential buyers in acquiring quality assets continues.

"We are seeing dealmakers go deeper and broader in their diligence to assess whether current deal valuations can deliver long-term value. Well-positioned buyers have the right deal strategies, integration plans and controls in place to execute quickly on opportunities, while successful sellers are providing a clearer and more transparent picture of their assets in order to minimize transaction timing."

Thirty-five transactions, representing 90% of the deal volumes, contributed $11.4 billion in total deal value, PwC found.

A survey by PLS Inc. and Derrick Petroleum Services last month reported that while the United States continued to dominate global M&A, deal values in the first half of this year represented the lowest six-month period since at least 2007.

"Divestiture activity is expected to continue as oil and gas companies continue to rebalance portfolios in rapidly changing markets, according to PwC. Four corporate transactions totaled $5.9 billion in 2Q2013, a decline from the 15 corporate deals in the year-ago period that totaled $18 billion.

For transactions valued at more than $50 million, the upstream accounted for 22 deals, representing more than half (56%) of total deal volume and totaling $6.4 billion. There also were 10 midstream deals that accounted for about one-quarter (26%) of the activity and worth a total of $6.2 billion.

According to PwC, "demand remains strong for gathering assets as companies look to buildout the infrastructure in shale plays. Three downstream deals added $1.1 billion, while oilfield services contributed four deals worth $3.6 billion" in the latest period.

Unconventional plays remained a key driver in deal activity, with 15 shale deals valued at more than $50 million, which contributed $7.5 billion, or 44% of total values. In the upstream sector, shale deals represented nine transactions and accounted for $3.1 billion, while six midstream sector shale deals contributed $4.4 billion, PwC said.

The " most active" shale plays for M&A with values of more than $50 million included the Eagle Ford Shale, with three total transactions contributing $1.5 billion; the Marcellus Shale with three worth a total of $416 million; and the Bakken Shale in North Dakota with two deals totaling $910 million. "The Utica Shale experienced no deal activity for the first time in seven quarters," said PwC.

Financial investors' deal activity, including private equity (PE), continued to trend lower, as it had in 1Q2013. There were only two transactions with values of more than $50 million. Total deal value was $686 million, slightly higher than in the first three months of this year, but it was down 90% from 2Q212, the consulting firm said.

"While PE remains very interested in the oil and gas sector, higher deal valuations, particularly for cash flowing assets, kept PE acquirers on the sidelines as domestic strategic acquirers found more opportunities to get deals announced at prices that didn't fit financial investors' models," said Meier. "We expect PE buyers to remain active in the space in the months ahead."

Meanwhile, master limited partnerships (MLP) were involved in seven transactions in 2Q2013, about 18% of all activity. In the first six months of this year, 17 total MLP deals represented about or 21%,of deal activity. "MLPs help satisfy certain investors' thirst for yield, and there is an ongoing interest in MLP dropdowns to support increased distributions," PwC said. There should be "accelerating deal activity in the upstream MLP space as these businesses supplement depleting assets in order to sustain and grow distributions."

Unlike the flurry of interest from foreign buyers in previous quarters, no deals by overseas firms were announced between April and June, the analysis found.

 "Strategically, foreign buyers remain interested in U.S. oil and gas assets," Meier said. "Similar to our perspective on PE buyers, we expect foreign buyers to continue to be active players in the U.S. oil and gas sector."

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