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Mega Deals Surge in Domestic Oil, NatGas Sector

Mergers and acquisitions (M&A) within the U.S. oil and natural gas sector was the strongest second quarter activity in five years, led by asset transactions, PwC US said Wednesday.

Most notable was "mega deal activity," which, when coupled with ongoing interest from overseas buyers, bolstered transactions in the first six months.

"The first three months of 2014 set the stage for the strongest second quarter of oil and gas deal activity that we've seen in the last five years," said PwC's Doug Meier, U.S. energy sector deals leader. "Over the past three months, we continued to see companies looking to realign their portfolios and divest noncore assets, which provided opportunities for acquirers with cash and access to capital."

PwC's Oil & Gas M&A quarterly analysis provides data on announced U.S. transactions valued at more than $50 million. The deals are analyzed using transaction data from IHS Herold.

"The theme to watch is whether large consumers of commodities, such as natural gas, accelerate their investment in exploration and production assets via investments or acquisitions," said Meier. "Additionally, we'll keep an eye on oil export opportunities given the recent rulings on condensate export."

Between April and June, 54 transactions were clinched with values eclipsing $50 million, with a total value of $42.2 billion. That compares with 2Q2013, when 47 transactions were reported totaling $30.3 billion. Activity also increased in 2Q2014 by 15% from 1Q2014's 47 deals, with total values climbing 131%. In the first half of 2014, there were 101 total transactions worth close to $60.5 billion.

For transactions valued at $50 million-plus, asset transactions dominated on 44 deals representing 81% of all the volumes. Asset values in all reached $27.3 billion, or 65% of all transactions. Corporate transactions included 10 deals worth $14.9 billion total.

Upstream domestic deals accounted for 61% of total deal activity with 33 transactions representing $21.7 billion, or 51% of the values. Specifically in the onshore, 21 shale-related transactions were announced worth $50 million or more, claiming $20 billion total and 47% of the total values. In the upstream sector, there were 17 shale-related transactions worth a total $11 billion, or 51% of upstream values. Four midstream shale-related deals also were made in 2Q2014, representing $9 billion.

"In the second quarter, overall shale deal value jumped substantially reaching $20 billion, compared to $4.4 billion in the first quarter of 2014 and $7.7 billion during the second quarter of 2013," said PwC's John Brady, a Houston-based partner with the energy practice. "The continued interest in shale plays is a testament to how companies and investors view the success of the unconventional landscape, especially as new technologies and methods come to fruition that increase speed and efficiency from the upstream and drilling process to transportation and bringing oil and gas to market."

The most active shale plays for M&A with values worth $50 million-plus were the Eagle Ford in Texas, with six deals valued at $6.9 billion total, followed by the Permian Basin with $1.1 billion in activity on three deals, and the Niobrara formation, also with three deals, valued at $432 million all together. The Marcellus Shale represented two deals worth $2.9 billion, while the Utica and Bakken shales each generated one deal.

Ten midstream deals contributed $12.1 billion to values in 2Q2014, and seven downstream deals added $7.5 billion. Those figures compare with year-ago transactions that included 12 in the midstream worth $17.5 billion and five in the downstream worth $1.4 billion. Only one segment stood out negatively for the latest period from a year ago: the number of oilfield services deals dipped 30%, and values fell 80%.

Foreign buyers claimed 15 transactions, accounting for $8.5 billion in value, a significant increase over one deal worth $590 million in 2Q2013. On a sequential basis, the number of foreign deals rose by half, from 10 total deals, and values also increased 98%.

Twelve mega deals in 2Q2014 accounted for $30.8 billion, or almost three-quarters of the total values, driven by large producers that divested valuable assets.

Master limited partnerships also generated a lot of activity with 19 transactions, representing close to 35% of total business, which is consistent with recent levels. As well, financial investors continued to show interest in the oil and gas industry with four total transactions worth a total $7.7 billion, a more than 400% jump from 2Q2013.

Deal activity in the Gulf of Mexico represented two transactions worth $251 million, a decrease from the five deals worth $4 billion in 1Q2014.

"There was an increase in financial investor involvement in the second quarter focused on midstream divestitures evenly split between corporate and asset," said the firm's Rob McCeney, U.S. energy and infrastructure deals partner. "In the second half of 2014, we expect private equity to continue to monetize assets, but also pursue divested assets in the midstream and upstream space as they continue to look for opportunities to deploy capital."

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