Interest in oil and gas deals to continue in 2014

January 29, 2014 | By Barbara Vergetis Lundin

Accelerated merger and acquisition (M&A) activity in the U.S. oil and gas industry throughout 2013, which included a strong uptick in the last three months of the year, led to 182 total deals accounting for $115.9 billion in total deal value for the year. As companies continue concentrating on sustaining growth and maximizing shareholder value, PwC expects continued interest in M&A activity in the sector throughout 2014.

During the final three months of 2013, there were a total of 51 oil and gas deals with values greater than $50 million accounting for $41.7 billion, a 154 percent increase in deal value from the 43 deals worth $16.4 billion in the third quarter of 2013. Deal volume in the fourth quarter dropped by 36 percent compared to the fourth quarter of 2012, with deal value falling 29 percent during the same time period. According to PwC, this drop-off in total deal volume and value in the most recent quarter versus the prior year can be attributed to the fact that fourth quarter 2012 deal activity was strongly influenced by pending changes in the U.S. tax law. Overall deal volume for 2013 decreased from the 212 deals worth $152.8 billion in 2012.

"During 2013, oil and gas companies focused on maximizing shareholder returns. This focus resulted in increasing dividends and share buybacks. Companies increasingly utilized divestitures of non-core assets to fund these cash returns to shareholders," said Doug Meier, PwC's US energy sector deals leader. "Overall, M&A activity has been robust for a number of years in oil and gas. We see that continuing as companies in the space focus on portfolio optimization – further investing in those assets that are generating strong returns and divesting those assets that are generating lower returns. We're spending a lot of time helping our clients explore and execute on a range of transactions. Additionally, we're also working with companies to drive operational efficiencies, synergy realization and improve enterprise-wide processes."

According to PwC, there were 27 deals with values greater than $50 million related to shale plays in the fourth quarter of 2013, totaling $23.8 billion, representing a 338 percent increase in total deal value compared to the third quarter of 2013. For all of 2013, there were 79 shale deals that contributed $53.2 billion, an increase of two deals when compared to full year 2012.

"In the fourth quarter of 2013, shale deal activity increased along with broader conventional industry activity, especially in the Marcellus Shale," said John Brady, a Houston-based partner with PwC's energy practice. "That basin bounced back in the quarter, as stronger performance per well has reinvigorated returns, driving additional interest in acreage in the Northeast. If shale plays continue to adapt more efficient production processes to optimize the play and improve returns, activity in unconventionals will continue to be robust."

During 2013, master limited partnerships (MLPs) were involved in 54 transactions, representing about 30 percent of total 2013 deal activity, consistent with recent historical levels.

"MLPs remain attractive investment vehicles because of their strong yields and efficient tax structures," said Meier. "However, the pressures on MLPs to keep cash flows high and bring in new assets will keep these operators on the lookout for more acquisitions, including new drop downs in the midstream space."

Financial investors continued to show interest in deal activity in the oil and gas industry with 11 total transactions, representing $10.6 billion during the fourth quarter of 2013 -- a 48 percent jump in deal value compared to the fourth quarter of 2012.

"Increased activity by financial investors illustrates the continued interest in the energy sector. Sellers outweighed buyers, particularly in the E&P sector with robust transaction values. Financial investor buyers added more midstream and oilfield services as corporate owners refocus on core operations," said Rob McCeney, PwC U.S. energy & infrastructure deals partner.

PwC notes that during the fourth quarter of 2013, there were eight mega deals, representing $26.4 billion, compared to three mega deals worth $6.4 billion in the third quarter of 2013. Also, foreign buyers announced four deals in the fourth quarter of 2013, which contributed $541 million, versus 10 deals valued at $3.4 billion during the same period last year.

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