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U.S. Dealmaking Off as Upstream Focuses on Organic Growth

Following a few years of operators tripping over themselves to expand U.S. oil and natural gas leaseholds, last year they were focused more on developing resources in hand rather than dealmaking, according to Deloitte Center for Energy Solutions.

"The prior three years saw a surge in merger and acquisition (M&A) activity as the industry focused on expanding acreage and drilling rights to capitalize on high oil prices, pursuing emerging unconventional shale plays and evaluating oilsands prospects," said Deloitte Vice Chairman John England, who leads U.S. the oil and gas practice. Deloitte on Tuesday issued its annual report on M&A activity.

"In 2013, many producers focused on developing properties acquired in previous years -- namely, on streamlining operations and maximizing returns on assets,” he said. “This emphasis on development and organic growth contributed to a drop in both deal values and the total number of deals completed."

Worldwide, the oil and gas sector's deal values in 2013 fell 41% to $205 billion from 2012's $349 billion. There also were 119 fewer deals last year, according to the latest annual report.

Deloitte's findings mesh with those of other M&A tallies for 2013. IHS Inc. reported that U.S. upstream transactions last year were smaller and more conventional -- versus unconventional (see Daily GPI, Jan. 3). Transaction experts PLS Inc. and Derrick Petroleum Services reported in January that the domestic land grab was substantially over as operators turned to funding scale and efficiency (see Shale Daily, Jan. 13). PwC on Thursday is scheduled to report its findings on last year's M&A activity.

Even with better prospects for liquefied natural gas exports, a revitalized petrochemicals industry, rising use of natural gas for transportation/power generation, and a higher manufacturing demand, U.S. producers seemed willing to maintain assets last year in hopes that commodity prices would rise, said England.

"The United States and Canada were the center of deal activity in 2013, accounting for 64% of all transactions. Many of the largest deals were strategic and enabled companies to increase their exposure to unconventional plays." Foreign investors, however, "seemed to be taking a pause during 2013."

Last year the oilfield services sector was affected by cost containment efforts by producers, with many more focused on reducing development costs.

"In 2013, the oilfield services sector deal values were down, but the number of transactions rose, which could indicate the sector may be ripe for consolidation, especially of smaller companies and those with specific technologies," said England. "Private equity also showed an interest in this sector."

Deal activity was dominated by the exploration and production sector, but the largest deal in 2013 was Royal Dutch Shell plc's $6.7 billion purchase of many Repsol SA midstream assets, according to Deloitte.

"As we move into 2014, deal activity could shift from the upstream sector to midstream infrastructure and downstream operations," said England.

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