U.S. merger and acquisition (M&A) activity in the U.S. oil and natural gas industry last year gained substantially following a flurry of activity in the final three months, according to PwC US.

Including 4Q2012 activity, there were 204 transactions in 2012 representing $146.2 billion. In 4Q2012 alone, M&A activity reached $56.2 billion, marking the second-highest level in 10 years after record set in 4Q2011 of $79.1 billion. PwC uses transaction data compiled by IHS Herold Inc. to complete quarterly transaction information for M&A valued at more than $50 million.

Unlike 2011, when shale and related infrastructure lifted domestic M&A (see NGI, Feb. 13, 2012), deals in 2012 weren’t based on one particular trend, but on several: private equity (PE) interest, foreign buyers, unconventional plays, and by companies attempting to finalize transactions before the end of the year — ahead of any possible tax changes by Congress resulting from fiscal cliff negotiations.

“M&A activity in the U.S. oil and gas sector was extremely robust in 2012, with the vast majority of that activity happening in the final three months of the year as many deals got pulled forward due to the uncertainty surrounding the fiscal cliff,” said PwC’s Rick Roberge, principal in the energy M&A practice. “This past year was a watershed moment for the industry, with private equity involvement reaching an all-time high, shale deal volume at a two-year high during the fourth quarter, and a jump in asset transactions as companies have shifted their focus to adding more profitable liquid rich shale plays to their portfolios.

“We expect to see a slight pause in M&A during the first part of 2013 as companies focus on the recent wave of deals announced, but believe 2013 will be another banner year for deals as the U.S. oil and gas industry is ripe for continued consolidation.” He noted that PwC’s recent Global CEO Survey found that energy chiefs are “among the most confident on growth prospects for this year than any other industry.”

Throughout 2013, “we believe the fundamentals are in place for continued transactions, including the potential for some very large deals to get done,” Roberge said. “The combination of independents [that] still control the majority of resources, and the majors [that] have strong balance sheets and financial muscle may result in consolidation, as the capital requirements to develop shale plays continues to grow. We also expect PE to remain active in new investments.”

In 2012, “we continued to see a fair amount of repositioning and realignment with companies around midstream assets in the Marcellus Shale and Utica Shale as they looked to build the infrastructure needed to transport the extracted oil and gas,” said PwC’s Steve Haffner, a Pittsburgh-based partner. “Given the disparity in commodity prices, we expect to see continued movement during the year from the Marcellus to the Utica, as the Utica is a more attractive play due to its higher liquid content.”

In 4Q2012, the biggest unconventional play deals were in North Dakota’s Bakken Shale, seven deals worth $4.1 billion, and in the Eagle Ford Shale, six worth $3.1 billion. PE activity in 2012 also marked an all-time high at 34 transactions representing $28.4 billion.

“In 4Q2012, there were 11 financial sponsor-backed deals worth $6.9 billion, a slight drop from the 13 PE deals in the fourth quarter of 2011 that totaled $13.6 billion,” said Roberge. “Additionally, there were 170 strategic deals in all of 2012 that contributed $117.8 billion, compared to 163 strategic deals in 2011 with a total deal value of $136.5 billion.”

The last quarter of 2012 included 64 strategic deals, almost a two-thirds (64%) increase from the 39 deals in the year-ago period Total deal value for strategics was $49.2 billion in 4Q2012, a decline year/year of $65.5 billion. Master limited partnerships (MLP) in 2012 were involved in 42 transactions, representing more than 20% of total annual activity. MLP activity has grown over the past two years, representing 18.4% in 2011 and 15.6% in 2010.

The upstream accounted for more than half (53%) of the 4Q2012 transactions at 40, which represented $38 billion, or 68% of total quarterly values. There were 22 upstream oil transactions, compared with five natural gas deals; 21 midstream deals contributed $10.9 billion. Nine downstream transactions in the final quarter added $5.9 billion, while oilfield services contributed five worth $1.4 billion.

Asset transactions dominated total M&A deals in 4Q2012 with 56, a trend that was noted in 3Q2012 and marking the “highest volume of asset transactions in at least 10 years,” with quarterly transactions representing a total $27.2 billion. For the year there were 158 asset deals worth $89.3 billion. Nineteen corporate transactions valued at more than $50 million also marked a 10-year high in 4Q2012, with values totaling $29 billion. In 2012 46 corporate deals were announced that contributed $56.9 billion.

According to PwC, there were 27 deals with values greater than $50 million related to shale plays in the fourth quarter of 2012, totaling $16.3 billion, an increase from the 22 shale-related deals during the fourth quarter of 2011, although total deal value was flat. For all of 2012, there were 77 shale deals that contributed $51.7 billion, an increase of two deals when compared to full year 2011, but a drop from the $72.7 billion in shale deal value from 2011. Included in the shale deals for fourth quarter 2012 were two transactions from the Marcellus Shale with a total deal value of $685 million and one Utica Shale deal worth $372 million.

Upstream and midstream unconventional reserves and shale-related transactions rose in 4Q2012 from a year earlier, with 17 deals worth $9 billion — one more than in 4Q2011, but below 4Q2011’s total value of $12.3 billion. There also were 10 midstream deals in 4Q2012 worth $7.3 billion, an increase from the six worth $4 billion in 4Q2011. Foreign buyers announced nine deals in 4Q2012 that contributed $3.2 billion, but the amount was well below values of the seven deals in 4Q2011 that totaled $10.4 billion, PwC said.

Separately, Ernst & Young reported late last month that annual transaction activity topped $400 billion, 20% higher than in 2011 and the highest ever reported on a global basis in reported deal value. “However, activity in terms of deal volume or the number of deals was down slightly for the year. A full $60 billion of the total transaction value involved Russia’s oil giant Rosneft, which struck deals with AAR and BP for the TNK-BP joint venture. Asian outbound oil and gas acquisitions had another strong year in 2012, and the acquisition pace looks to continue in 2013.”

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