Record cash flows pushed deal activity in the oil and gas industry to levels rivaling the mega merger highs of 1998, according to a recent report by PricewaterhouseCoopers (PwC). Gas deals dominated the list of the largest transactions in 2006, with six out of the eight upstream deals in the top 10 deal list. This was in contrast to the previous year when only two deals in the top 10 of all deals and four of the top 10 of upstream deals were gas-dominated.

The total value of oil and gas deal activity in North America leapt by 40%, from $118 billion in 2005 to $164.7 billion in 2006, the firm said. The total number of deals remained the same but the number of large deals, worth $1 billion or more, increased from 21 to 32.

"O&G Deals," the first annual analysis by PwC of merger and acquisition (M&A) activity in the oil and gas sector, reports that average deal value in the sector rose 18% in 2006, pushing the aggregate M&A total to $291 billion, up $41 billion or 16% on the previous year.

Unlike in the past, it is not the majors that are fueling much of the deal momentum. Instead, the report points to four key drivers of deal activity:

The rise of private equity players and consolidation at the top of the midsize energy market characterized the table-topping deals of 2006. Kinder Morgan's management and private equity buyout (see Daily GPI, April 19) and Statoil's purchase of Norsk Hydro's oil and gas division (see Daily GPI, Dec. 19, 2006) each provided $32 billion in evidence of these two deal forces at work.

"The mix of players and forces at work mean the market for deal activity is now more broadly based," said Rick Roberge, PwC U.S. energy transaction services leader. "In the period ahead, we are likely to see continued momentum in oil and gas deal activity. The pressure to replace reserves and the structural rationale for consolidation will remain. It is clear that consolidation has a long way to run in the independent and mid-size sector of the market, particularly in North America. At the same time, the NOCs and private equity players will be key drivers of deal activity both in the mid-tier and the top end of the market."

The report can be downloaded here.

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