More investments in U.S. shale plays and related infrastructure, as well as sustained interest from foreign buyers and private equity firms, significantly lifted the total value of U.S. natural gas and oil mergers and acquisitions (M&A) in 2011, according to an analysis by PwC US.

The analysis, completed quarterly by PwC, used transaction data from IHS Herold to review announced U.S. transactions that were valued at more than $50 million.

“M&A activity in the U.S. oil and gas sector was extremely active in 2011 as shale plays continued to attract the large multi-national energy companies, foreign buyers and private equity firms,” said PwC’s Rick Roberge, a principal in the energy M&A practice. “New drilling techniques in hydraulic fracturing are uncovering vast amounts of crude oil and natural gas in a very accessible environment to oil and gas reserves and this is what is contributing to the huge interest in shale plays.

“The low price of natural gas, partially due to the increase in supply, has also driven a shift toward more oil and liquid plays as companies and investors look to take advantage of oil prices, which is holding steady at $100/bbl. We expect deal flow to remain active in 2012, despite continuing economic uncertainty, due to attractive commodity prices, which promotes exploration and development as well as upstream M&A activity.”

Deal values increased throughout 2011 as producers shifted toward more oil and liquids-heavy investments and away from gassy formations.

According to PwC, 191 transactions accounted for $186.5 billion in activity last year, an increase from $138.5 billion in 2010. That was five more deals than were announced in 2010. Average transaction size also jumped last year to $977 million, which was 38% higher than the $706 million in 2010. The increase in size was driven by 32 “mega deals,” which were valued at $1 billion or more.

Forty-eight transactions were announced in the final period of 2011, which together were worth $80.5 billion. The number of deals in the latest period fell by a quarter year/year but the value of the transactions rose 89%, compared with the 64 deals valued at $42.6 billion in 4Q2010.

According to the analysis, 11 corporate transactions generated almost three-quarters (72%), or $58 billion, of total 4Q2011 values — a 350% increase in total deal value year/year. Thirty-seven asset deals contributed $22.5 billion, compared with 51 asset deals that had a combined value of $29.7 billion a year earlier.

Upstream deal making accounted for most of the activity in 4Q2011 with 23 announced transactions, or nearly half (48%) of total deal volume, valued at $24 billion. Twelve midstream transactions represented 60% of total deal value at $48 billion. Meanwhile, oilfield equipment transactions in 4Q2011 contributed eight transactions totaling $4.5 billion, while five downstream deals contributed $4.1 billion.

Seventeen of the transactions in the last three months of 2011 were shale-related, PwC noted. The shale deals together were valued at $57 billion, compared with 32 shale-related transactions representing $29.3 billion in 4Q2010. Average shale-related transactions in 4Q2011 jumped 209% to $3.4 billion.

“In all of 2011, there were 68 total shale-related deals, with values greater than $50 million — a decline from the 85 shale-related deals in all of 2010,” noted PwC. “But the total value of shale deals in 2011 jumped 55% to $107 billion from $68.9 billion in 2010.”

In the upstream sector, shale transactions represented 51% of total upstream deal values in the final period of 2011. Eleven transactions together were valued at $12.3 billion. For the year, 55 shale-related deals in the upstream sector totaled $59.6 billion, or 81% of total upstream deal value.

Four shale-related transactions totaling $3.5 billion that were announced in 4Q2011 involved the Marcellus Shale, while three Utica Shale deals had a total value of $3.6 billion. For the year, a total of 13 deals in the Marcellus Shale were worth $9.9 billion, compared with 22 deals that totaled $20.3 billion in 2010. The Utica Shale had seven transactions that represented $6.7 billion in 2011, versus one deal in 2010 that was valued at $178 million.

“The industry continued to make a paradigm shift to shale in 2011 with virtually every major oil and gas company taking a position in unconventional plays,” said Steve Haffner, a Pittsburgh-based partner with PwC’s energy practice. “Activity in the Marcellus Shale remained strong for patient buyers waiting out the supply-demand dynamics of natural gas.

“Toward the end of last year, we saw many investors looking at the Utica Shale as the next area of interest to take advantage of the more liquids-rich resource, and its proximity to major metropolitan areas. Companies are now focused on building the related infrastructure to transport the extracted oil and gas, which we believe will likely be a key driver of M&A activity in 2012.”

Foreign buyers announced 10 transactions in 4Q2011 that were valued above $50 million, two fewer year/year. Total deal value, however, climbed in the final quarter to $13.9 billion from $9.4 billion. For the year there were 40 transactions by foreign buyers, five fewer than in 2010, but total deal value in 2011 jumped 55% to $56.4 billion.

In addition, transactions sponsored by financial entities “increased dramatically” in 4Q2011 to $8.8 billion, versus $353 million in 4Q2010, when three deals were announced. For the year, 10 deals involved financial sponsors, one less than in 2010, but total value skyrocketed to $13.2 billion in 2011 from $3.1 billion in 2010.

“International players invested heavily in U.S. shale plays through joint ventures in 2011 — and we believe a trend to watch out for in 2012 is for foreign buyers to look to acquire entire companies that operate in shale plays so they can take more control of the assets through operatorship,” said Roberge. “We also saw major private equity firms making big bets in the energy industry in 2011 and we expect their activity may accelerate as favorable oil price outlooks provide an attractive investment rationale.

“As deals continue in 2012, corporates and private equity firms should consider focusing on maximizing the assets they acquire and ensuring they have the right deal strategies, integration plans, and controls in place to successfully navigate this evolving and complex landscape.”

In a separate survey issued this week by Deloitte LLP, the consultancy found that the biggest driver for investments in 2011 was “enabling technology events” to unlock shale’s potential. That trend is seen continuing this year. Technology, the survey noted, has changed market dynamics globally and across nearly all U.S. energy sectors: E&P, midstream, oilfield services, refining and petrochemicals.

“While deal activity remained steady in the second half of 2011, the value of the deals increased significantly,” the Deloitte report noted. “Robust” deal making is forecast to continue this year, as long as oil prices are above $80/bbl.

“The rapid reversal of fortune for domestic energy producers and related industries has been astounding, and signals a bright future for the energy industry as well, as customers in may other industries that can take advantage of closer, more stable and more competitively priced energy supplies,” Deloitte noted.

Some uncertainty exists in the upstream sector among those surveyed regarding environmental issues. “Regulatory issues will force cost increases but should not affect overall domestic E&P activity,” Deloitte said. Also on the horizon is more midstream activity.

According to Deloitte, more than $210 billion “is required to fully develop America’s pipeline infrastructure to meet rising energy production from unconventionals. The need for infrastructure investment and ability to serve the changing needs of customers and producers is spurring M&A activity and consolidation in the midstream market.”

Because oilfield services companies are “struggling” meet demand for onshore and offshore E&P, they too are making acquisitions, “not just to gain access to technology or assets but also to secure the talent and know-how necessary to provide the right services in the right places…” More consolidation in the sector is expected, according to Deloitte.

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