Merger and acquisition (M&A) activity in the U.S. oil and natural gas sector has overcome challenges year to date to surpass 2009 levels, an analysis by PwC US said.

Using transaction data from John S. Herold Inc., the PricewaterhouseCoopers LLP subsidiary attributed the increase in deal activity to companies' "ongoing effort to reorder their portfolios, continuing interest in non-U.S. oil companies in shale plays and the expansion of product lines and markets served by equipment and service companies." On Tuesday Chevron Corp. said it would acquire Atlas Energy Inc. in a deal valued at about $4.3 billion; the deal wouldn't be recognized until 4Q2010 data is reviewed (see related story).

According to PwC, for the three-month period ending Sept. 30, there were 39 deals with reported value of more than $50 million (totaling $17.6 billion in deal value) representing an increase of nearly 20% from the year-ago period. In terms of volume, 3Q2009 saw nine fewer deals (30) of more than $50 million with total deal value of $14.7 billion.

"The oil and gas sector continues to see a strong level of activity, despite lingering uncertainty regarding equity markets, relatively low commodity prices (particularly gas), and uncertainty surrounding relative currency values," said PwC's Michael Collier, U.S. leader of the energy M&A practice. "Not only are we seeing steady deal flow among corporates in the space, financial sponsors are starting to emerge again and we expect they will be major players this year and next. We're optimistic for the remainder of 2010 and 2011, and the significant backlog of deals in the pipeline is generating a lot of activity."

As in 2Q2010, upstream asset-focused deals dominated deal activity in 3Q2010, comprising 71% of deal volume and 57% percent of value. According to PwC, the relatively large volume of asset sales reflected the size of major upstream transactions, particularly in the shale plays.

"There is a healthy level of deal volume around divesting of noncore assets as companies look to maximize their return on capital deployed and raise funds to continue their development efforts, particularly in the shale plays," said Collier. "As for the Gulf [of Mexico], players are in the process of deciding whether they will be in or out, and while the moratorium was technically lifted recently, there is still a de facto moratorium as permits remain difficult to secure. Drilling activity in the Gulf will take time to fill in, and we're seeing capital budgets being set for 2011 that assume very low activity. Companies are actively working on the decision to either leave the Gulf or ride out the storm."

Of the $17.6 billion in value, about one-quarter of the total involved shale gas plays, as some companies secured their position for the longer term, according to PwC. "Shales with higher liquid content like the Eagle Ford have been particularly attractive acquisition targets as companies look to take advantage of what many perceive to be a sustained period of low gas prices," Collier said.

In 3Q2010 the average value of deals for more than $50 million fell to $450 million from an average of $490 million in the year-ago period, demonstrating companies' "ongoing focus" to optimize their portfolios. "While we're seeing an increase in larger deals, the average deal value is not rising; in fact, it declined slightly. This alone doesn't represent a significant trend, except that it's relatively strong for the third quarter, which is historically a seasonally slow time for deals," he said.

In the first nine months of this year PwC determined that there were 141 deals with reported value of more than $50 million, representing $100.4 billion, versus 70 deals with $34.9 billion in the first three quarters of 2009 -- a 101% increase in volume and a 187% increase in value.

"Despite the possibility of tax increases in 2011, we aren't seeing many deals rush to close before year-end," said Collier. "Dealmakers remain conservative and are focused on creating value and avoiding costly mistakes. They are taking their time to make sure the value in the deal is protected, through careful diligence and thorough preparation before signing and close.

"We're also seeing more attention paid to post-deal performance particularly in the first 100 days. As companies emerge from the financial crisis, it is clear they are very focused on operational excellence. The same seems to characterize M&A activities. As we head into the next energy M&A upcycle, it feels as though the bar has been set very high in terms of deal execution excellence."

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