Divestitures drove U.S. oil and gas merger and acquisition (M&A) activity in the second quarter of 2013, according to PwC US. While second quarter deal volume and value decreased 26 percent and 43 percent, respectively, compared to the second quarter of 2012, interest in energy M&A transactions remained robust.
For the three month period ended June 30, 2013, there were a total of 39 oil and gas deals with values greater than $50 million, accounting for $17.2 billion in deal value, a decrease from the 53 deals worth $30.4 billion in the second quarter of 2012.
On a sequential basis, deal volume in the second quarter dropped by five percent compared to the first quarter of 2013, with deal value falling by 37 percent during the same time period.
“There were two main factors that caused a drop in announced deals during the second quarter – companies remained focused on the critical task of integrating assets they acquired during 2012 and sellers bringing deals to market that are fully priced,” says Doug Meier, US energy transactions & deals leader, PwC.
However, interest from potential buyers in acquiring quality assets continues, he adds.
“We are seeing dealmakers go deeper and broader in their diligence to assess whether current deal valuations can deliver long term value,” he says. “Well-positioned buyers have the right deal strategies, integration plans, and controls in place to execute quickly on opportunities while successful sellers are providing a clearer and more transparent picture of their assets in order to minimize transaction timing.”
There were 35 total asset transactions, representing 90 percent of total deal volume, which contributed $11.4 billion in total deal value.
Divestiture activity is expected to continue as oil and gas companies continue to rebalance portfolios in rapidly changing markets, according to PwC. There were four corporate transactions totaling $5.9 billion in the second quarter of 2013, a drop from the 15 corporate deals that totaled $18 billion during the same period in 2012.
For deals valued at over $50 million in the second quarter, upstream deals accounted for 22 transactions, representing 56 percent of total deal volume and totaling $6.4 billion.
Additionally, there were 10 midstream deals, accounting for 26 percent of total deal volume in the quarter worth a total of $6.2 billion.
According to PwC, demand remains strong for gathering assets as companies look to build-out the infrastructure in shale plays. Three downstream deals added $1.1 billion, while oilfield services contributed four deals worth $3.6 billion during the second quarter of 2013.
Shale deals remained a key driver for deal activity in the second quarter, with 15 shale deals with values greater than $50 million that contributed $7.5 billion, or 44 percent of total deal value.
In the upstream sector, shale deals represented nine transactions and accounted for $3.1 billion, while six midstream sector shale deals contributed $4.4 billion in the second quarter of 2013.
The most active shale plays for M&A with values greater than $50 million during the second quarter of 2013 include the Eagle Ford in Texas with three total transactions contributing $1.5 billion, the Marcellus Shale with three deals totaling $416 million, and then the Bakken in North Dakota with two deals totaling $910 million.
The Utica Shale experienced no deal activity for the first time in seven quarters, according to PwC.
Financial investors’ deal activity, including Private Equity (PE), in the oil and gas industry continued its trend from the first quarter with volume remaining low with just two transactions with values greater than $50 million in the second quarter.
Total deal value was $686 million, a slight increase from the first quarter of 2013, but a 90 percent decrease compared to the same period in 2012. PE investors opted to stay on the side lines, partly due to the uptick in valuations.
“While PE remains very interested in the oil and gas sector, higher deal valuations, particularly for cash flowing assets, kept PE acquirers on the sidelines as domestic strategic acquirers found more opportunities to get deals announced at prices that didn’t fit financial investors’ models,” adds Meier. “We expect PE buyers to remain active in the space in the months ahead.”
PwC notes that in the second quarter of 2013, master limited partnerships (MLPs) were involved in seven transactions, representing 18 percent of total deal activity. Additionally, in the first half of the year, there were 17 total MLP deals, or 21 percent of total deal activity.
MLPs help satisfy certain investors’ thirst for yield, and there is an ongoing interest in MLP “drop downs” to support increased distributions, according to PwC. The organizations also expects accelerating deal activity in the upstream MLP space as these businesses supplement depleting assets in order to sustain and grow distributions.
In the second quarter of 2013, there were no announced deals from foreign buyers, representing a significant change from previous quarters.
“Strategically, foreign buyers remain interested in U.S. oil and gas assets,” Meier says. “Similar to our perspective on PE buyers, we expect foreign buyers to continue to be active players in the U.S. oil and gas sector.”
PwC’s Oil & Gas M&A analysis is a quarterly report of announced U.S. transactions with value greater than $50 million analyzed by PwC using transaction data from IHS Herold.
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