Private equity opportunists buying distressed U.S. natural gas assets helped to sustain merger and acquisition (M&A) activity in the U.S. oil and gas sector in the first three months of this year, according to PwC US.

PwC's Oil & Gas M&A quarterly analysis found that 11 transactions were announced that were worth a total of $11.5 billion in the first three months, with 44 total transactions valued at more than $50 million, accounting for $34 billion in total deal value. PwC's report compiles announced U.S. transactions valued at more than $50 million using IHS Herold data.

The quarterly transactions essentially were unchanged from the year-ago ago period, when 45 transactions worth a total of $34.6 billion were announced. A small uptick was recorded in 1Q2012 in the average deal size, to $773 million from $768 million, driven by nine "mega" deals valued at $1 billion or more. However, deal volumes dipped 58% from the final period of 2011, when 48 transactions worth a total $80.5 billion were announced, mostly driven by depressed natural gas prices.

"Although deal activity has remained consistent year/year, we are beginning to see a softening of deal flow when compared to the past few quarters," said PwC's Rick Roberge, principal in the energy M&A practice. "This past quarter, however, was a watershed moment for private equity activity, and we're seeing an increased appetite from these investors to deploy their dry powder in oil and gas transactions.

"The 10-year low natural gas prices have attracted private equity [PE] as they see opportunity getting in at the bottom and are taking a long-term view of natural gas pricing. Corporates, meanwhile, view natural gas plays at these prices as a challenge to the industry. And while a majority of PE activity has been in the upstream sector, we may see a trend toward growing investments in the downstream space with an eye toward refineries, an area which has had very limited activity."

PwC found that 13 transactions totaling $8.4 billion, or 28% of the total deal value, were in unconventional plays. In the upstream sector, "shale deals represented 33% of total upstream deal value in the first quarter of 2012, accounting for nine deals with a total value of $5.3 billion." Included in the shale-related transactions were two in the Marcellus Shale totaling $2.9 billion and one in the Utica Shale that contributed $112 million.

"Natural gas prices are having an impact on shale M&A, with total deal value down about 22% when compared to the first quarter of 2011," said PwC's Steve Haffner, a Pittsburgh-based energy practice partner. "Companies with interests in the Marcellus Shale are focused on maximizing their returns on earlier transactions and managing their existing operations and cash flow in light of the depressed gas prices.

"We expect M&A activity to slow in the region throughout the remainder of the year as players wait for improved natural gas prices. That 'wait and see' approach is also impacting activity in other shale plays like the Utica Shale."

According to the latest data, 18 corporate transactions were valued at more than $50 million, with a total deal value of $15.8 billion.

Twenty-six asset deals contributed $18.2 billion, or 53% of total deal value. Compared with a year ago, seven more corporate transactions were announced, but the total deal value fell from the $17.5 billion that was generated a year earlier. The number of asset transactions declined from 34 deals in 1Q2011, but average deal value jumped 40% to $700 million.

For deals valued at more than $50 million, upstream activity accounted for 27 of the transactions, or a healthy 61%, accounting for $20.1 billion, or 59% of total value. Oilfield services contributed seven transactions worth an estimated $$2.5 billion. Six midstream and four downstream deals contributed $7 billion and $4.3 billion in value, respectively.

Foreign buyers announced five deals valued at more than $50 million in the first three months of 2012, which contributed $4.3 billion, versus six valued at $8 billion a year ago, PwC said. "International players are still investing in a major way through joint ventures in U.S. shale plays as they're attracted to the country's stable economic and political environment and gaining the technology in shale resource plays," said Roberge. "We believe that interest from foreign buyers will remain throughout 2012.

"Another development that we believe will continue to get increased attention is the increase in permits for drilling in the Gulf of Mexico over the past year. Companies looking to gain exposure to conventional sources of energy are looking more closely at the Gulf for opportunities -- and although M&A activity has been slow to come back in the region, the fact that permits are on the rise is evidence that the Gulf is back in business."

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