The desire to acquire shale acreage and midstream assets in the United States continues to be strong, with domestic natural gas and oil mergers and acquisitions (M&A) values reaching $39 billion in the second quarter, according to an analysis by PwC US.

PwC’s Oil & Gas M&A analysis is a quarterly report of announced domestic transactions valued at more than $50 million based on transaction data from John S. Herold Inc.

Between April and June, 51 announced deals were valued at more than $50 million, compared with 61 announced deals valued at $41 billion in the same period of 2010, the analysis found. The volume and value of transactions dipped slightly year/year, but the average value for transactions above $50 million jumped to $765 million in 2Q2011, a 14% increase from a year earlier when the average value of a transaction was $672 million.

“There continues to be steady M&A activity in the oil and gas sector with strong competition for prized assets, which has maintained the deal momentum throughout the first half of the year,” said PwC’s Rick Roberge, a principal in the energy M&A practice. “The second half of the year has already kicked off with one mega-deal announced, and we expect that deal momentum to continue.”

One of the biggest shale-related transactions in 2Q2011 was Marathon Oil Corp.’s $3.5 billion deal to acquire the Eagle Ford assets of Hilcorp Resources Holdings LP, which more than doubled its leasehold position (see NGI, June 6). Another big deal was Chevron Corp.’s agreement to pay what analysts estimated was about $1.25 billion to buy 228,000 net acres in the Marcellus Shale from Chief Oil & Gas LLC and Tug Hill Inc. (see NGI, May 9a).

In the third quarter to date Australia’s BHP Billiton Ltd. has offered to buy shale pioneer Petrohawk Energy Corp. for $12.1 billion (see NGI, July 18a). Also on the radar is the fight for Southern Union Co., which in July accepted a $5.7 billion cash-and-stock takeover bid from Energy Transfer Equity LP (ETE) (see NGI, July 25). ETE and Williams have been counterbidding for the Southern Union gas pipeline assets since June; the deal with ETE has yet to be finalized (see related story).

Roberge said “foreign and private equity interest in North American oil and gas assets remains very high and will likely be a driver of ongoing activity.” Foreign buyers announced 18 deals valued at more than $50 million in the latest quarter, which contributed $36.2 billion, or 72%, of total deal value. In the year-ago quarter 27 transactions valued at $24.2 billion were announced.

For all of the 2Q2011 transactions valued at more than $50 million, 11 were in the midstream sector, which accounted for $19.9 billion (51%) of total deal value, compared with six midstream deals worth $3.4 billion in the same period last year. Transactions in the upstream space led all oil and gas subsectors with 26 deals, or 51%, of volume in the quarter, PwC noted.

One of the big midstream deals announced in 2Q2011 was ONEOK Partners LP’s plans to spend $910 million to $1.2 billion between now and late 2013 on natural gas liquids infrastructure in Texas (see NGI, May 9b). In May Kinder Morgan Energy Partners LP agreed to spend $855 million and assume debt to buy Petrohawk’s half of the companies’ Haynesville Shale midstream joint venture (see NGI, May 9c).

According to the PwC analysis, seven of the top 10 deals by value in 2Q2011 were related to shale plays, including four in the upstream and three transactions in the midstream and oilfield services space. For all of the transactions valued at more than $50 million, 10 were shale-related transactions totaling $7.5 billion, or 19%, of total deal value, including two involving the Marcellus Shale that together totaled $2.3 billion.

“Shale gas assets continue to be very attractive acquisition targets as multinationals look to gain technical know-how and exploit the long-term value and opportunities from rising energy needs,” said PwC’s Steve Haffner, a Pittsburgh-based energy practice partner. “At the same time, there is tremendous activity developing around natural gas infrastructure, which is necessary to move the extracted gas to market. The U.S. ‘shale gale’ continues to attract the attention of global companies.”

Five financial sponsor-backed transactions representing $6.1 billion, or 16% of total deal value, were announced in the latest quarter, versus 10 financial sponsor deals contributing $6.2 billion a year earlier. Through June of this year 16 financial sponsor deals contributed $20.6 billion, “a whopping 129% increase in deal value,” versus the first half of 2010 when 15 financial sponsor-backed deals valued at $9 billion were announced, PwC stated.

In 2Q2011 oil prices surpassed $100/bbl, which contributed to the strong deal values, according to the analysis.

“With oil prices hovering at $100, private equity funds continue to make a very strong push in the oil and gas sector,” said Roberge. “The private equity deal makers, who used to largely play in the midstream space, are now heavily involved in exploration and production (E&P), shale plays, and [the] oilfield services and equipment sector. However, along with the great opportunities and rewards of investing in oil and gas, there is still risk in this space — and new entrants need to understand the pitfalls before trying to exploit these possible opportunities.”

For transactions valued at above $50 million, PwC noted that there were 18 corporate transactions totaling $26.8 billion (69%) of total quarterly deal value, versus 22 deals that accounted for $25.9 billion in the same period of 2010. Thirty-three asset deals for a combined total of $12.2 billion were announced in the latest quarter, down from 39 deals totaling $15.1 billion a year ago.

“However, when comparing the first six months of 2011 to the first half of 2010, the number of corporate transactions increased by three deals to 35 transactions, while total corporate deal value jumped 26% to $59.7 billion in 2011 from $47.6 billion in 2010,” the analysis noted.

One M&A activity driver “is the desire from some oil companies to sell assets and break apart key lines of business,” said PwC. Among the bigger natural gas players, ConocoPhillips, Williams and El Paso Corp. all are readying plans to spin off their E&P businesses (see related stories and NGI, July 18b).

“We believe that another factor to keep a close eye on throughout the year, which may add to the already robust M&A activity we’re seeing, is the trend of integrated oil companies looking at the various options to unlock shareholder value through separating their E&P businesses,” said Roberge. “While this trend could be a very positive driver of M&A activity, these are highly complex transactions with potential consequences around tax considerations, valuations and financial reporting. Companies should consider the risk with these types of transactions as every potential scenario needs to be thoroughly and diligently evaluated to succeed.”

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