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    Foreign buyers prop up M&A activity as private equity pauses during 1Q13

    PwC US notes that first-quarter deal volume and value increased year over year, and shale deals comprised 46% of total deal volume.

    PwC has released its first-quarter analysis for merger and acquisition deals in the oil and gas sector. It showed that while private equity moved to the sidelines in 1Q13, deal activity was propped up by foreign buyers who focused on the upstream sector and by strategic investors who searched for shale opportunities.

    Among the key findings and topics covered by the report:

    • The acceleration of deals in 4Q12 due to the fiscal cliff affected deal volume in 1Q13;
    • Shale deals comprised 46% of total deal volume;
    • The most active shale play for M&A was the Eagle Ford, followed by the Marcellus Shale, the Utica Shale, and then the Bakken.

    The acceleration of deals at the end of last year to get ahead of the fiscal cliff and the seasonality of low first-quarter deal volume resulted in a decline of oil and gas M&A activity in the first three months of 2013 compared with the fourth quarter of 2012, says PwC US. While private equity activity moved to the sidelines, deal activity was propped up by foreign buyers, who focused on the upstream sector, and strategic investors who continued to look for opportunities in shale plays. These factors led to an increase in both deal volume and value compared to the same time period in 2012.

    For the three- month period ending March 31, there were a total of 39 oil and gas deals with values greater than $50 million, accounting for $27.0 billion in deal value, an increase from the 34 deals worth $25.7 billion in the first quarter of 2012. However, on a sequential basis, deal volume in the first quarter of 2013 dropped 48% from the 75 deals in the fourth quarter of 2012, with total deal value in the first three months of the year declining 52% from $56.2 billion in the fourth quarter of 2012.

    A rig drilling for Anadarko in the Eagle Ford. PwC lists the Eagle Ford as the No. 1 shale play in the US for M&A activity in 1Q13. Photo courtesy of Anadarko Petroleum
    A rig drilling for Anadarko in the Eagle Ford. PwC lists the Eagle Ford as the No. 1 shale play in the US for M&A activity in 1Q13. Photo courtesy of Anadarko Petroleum

    "With the acceleration of deal activity in the final three months of 2012 due to the looming fiscal cliff, in addition to the seasonal slowdown of deal making during the first quarter, we had anticipated this drop-off in M&A activity," said Rick Roberge, principal in PwC's energy deals practice. "Foreign buyers, though, are still looking for opportunities to expand in US shale plays and are extremely active in upstream prospects – and they're willing to acquire those assets at a premium. At the same time, while private equity activity in the oil and gas industry recently hit an all-time high, the increase in asset valuations has caused them to move to the sidelines so far this year. However, we expect private equity involvement to pick up, in line with our outlook in "The US Energy Revolution: The role of private equity in oil and gas."

    Foreign buyers announced nine deals in the first quarter of 2013, which contributed $4.1 billion or 15% of total deal value, versus six deals valued at $5.9 billion during the same period last year. On a sequential basis, the number of total deals remained the same as total deal value increased 28.1%.

    Private equity deal activity in the oil and gas industry dropped in the first quarter of 2013 with only two transactions with values greater than $50 million, which represented a total deal value of $576 million, compared to seven financial sponsor-backed deals worth $13 billion in the first quarter of 2012.

    Additionally, there were 34 strategic deals that contributed $26.4 billion and made up 98% of total deal value in the first three months of 2013.

    There were 35 total asset transactions, representing 90% of total deal volume, which contributed $17.2 billion – a 30% increase in deal volume from the 27 asset transactions during the first quarter in 2012, but a slight decline from the $18.2 billion in total deal value during the same period last year. There were four corporate transactions totaling $9.8 billion in the first three months of 2013, a small dip from the seven corporate deals during the first quarter of 2012, although deal value had increased from $7.4 billion.

    For deals valued at over $50 million, upstream deals accounted for 23 transactions, representing $12.6 billion, or 47% of total first quarter deal value. The number of oil deals within the upstream sector totaled 11, compared to five upstream gas deals in the quarter. There were 11 midstream deals that contributed $10.0 billion, a 120% jump from the five midstream deals during the first quarter of 2012, which totaled $3.2 billion. Three downstream deals during the first quarter of 2013 added $3.9 billion, while oilfield services contributed two deals worth $465 million.

    According to PwC, there were 18 deals with values greater than $50 million related to shale plays in the first quarter of 2013, totaling $16.3 billion, or 60% of total deal value. In the upstream sector, shale deals represented 11 transactions and accounted for $5.0 billion, or 40% of total upstream deal value in the first quarter of 2013.

    Included in the shale-related deals in the first quarter of 2013 were three transactions involving the Marcellus Shale totaling $882 million and two Utica Shale deals that contributed $283 million. Compared to the first quarter of 2012, Marcellus Shale deal volume was flat, although total deal value decreased from $3.0 billion. Utica Shale deal activity increased from one transaction worth $112 million during the first three months of 2012.

    "The main story in the first quarter of the year continues to be about shale," said Steve Haffner, a Pittsburgh-based partner with PwC's energy practice. "We're seeing interest in both the Marcellus and Utica, and we don't expect to see that enthusiasm dissipate anytime soon. While that interest hasn't translated to a dramatic increase in the volume and value of shale deals in the region, potential buyers are seeking the right opportunities to establish their footprint in the area – or to expand – and that includes both private equity and foreign buyers."

    The most active shale plays for M&A with values greater than $50 million during the first quarter of 2013 include the Eagle Ford in Texas with five total transactions representing $5.1 billion, followed by the Marcellus Shale, the Utica Shale, and then the Bakken in North Dakota with one deal totaling $513 million.

    "The first quarter saw a divergence in buyer-seller price expectations around gas assets, as natural gas prices bumped up from recent historical low levels," added Roberge. "These higher valuations for gas assets, combined with continued high valuations in the sweet spots of the liquid rich shale plays, were a major contributor to PE firms largely sitting out this quarter, but it's critically important for PE's and strategics alike to be ready when opportunity surfaces and prices are more favorable, as buyers will be lining up. Making sure they have the right strategies, integration plans, and controls in place will make for a better prepared buyer that maximizes the chances for success."

    PwC notes that during the first quarter of 2013, master limited partnerships were involved in eight transactions, representing more than 20% of total deal activity and continuing the trend of MLP involvement in deal transactions, as MLPs represented 20.6% of total deal activity in 2012.

    PwC's Oil & Gas M&A analysis is a quarterly report of announced US transactions with value greater than $50 million analyzed by PwC using transaction data from IHS Herold.

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