US oil and gas deal flow shoots up in second quarter

Mergers and acquisitions in the US oil and gas sector shot up in the second quarter, reaching their highest level in more than seven quarters, according to a report released today by PricewaterhouseCoopers (PwC). Michael Collier, US leader of PwC’s energy M&A practice, says a key reason is that the expectations of buyers and sellers have finally aligned. In addition, he cites improved credit markets, increased CEO confidence and stabilized commodity prices.

According to the report, the US oil and gas sector had 142 announced deals in the second quarter – the highest volume seen since the third quarter of 2008, when there were 190. The total value of the deals was $36.9bn, up from $13.7bn in the year-earlier quarter – representing a 169 per cent increase year on year. Here is what Mr Collier said in the report:

Deal activity in the Oil & Gas sector rebounded significantly in the second quarter – and we expect the momentum to continue throughout the second half of the year. As commodity prices and equity markets continue to stabilize, senior managers are showing greater inclination to do transactions today than we’ve seen over the past two years.  At the same time, buyers and sellers are more aligned when it comes to valuations, which is helping to drive the market and to ultimately get deals done.

Some other interesting takeaways. Mr Collier said in an interview that a very large proportion of asset deals involve companies reorganizing their portfolios. Some are moving into shale gas, betting on its long-term value; while others are moving into oil to take advantage of its price strength. Sort of like “ships passing in the night”. However, there is very little interest in renewables because the price of natural gas is so low it has changed the economics of renewable deals.

Two years ago, it seemed there was tremendous upside in renewables.

Another factor that might change momentum going forward could be any new government regulations coming out of the spill in the Gulf of Mexico. If the cost and liabilities associated with drilling deep-water wells goes up, some companies could be forced to decide to leave the deep-water, leading to asset sales. Others might agree to join forces to meet the new challenges. Mr Collier said:

While the oil spill has created some uncertainties for deepwater assets, the US government policy response will be the real driver as CEOs of both resource and equipment and services companies rethink the risks/rewards of doing business in the deep water.

Jon McCarter, transaction advisory services leader for the Americas oil & gas center at Ernst & Young, warned that the environment could change significantly with the passage of new energy policy legislation or setbacks in the global economic recovery.

Regardless of what happens offshore, a clear beneficiary has been – and is expected to continue to be- the unconventional shale gas scene. PwC said there were $13.4bn of deals related to assets sales that involved non-US entities taking positions in shale gas, and unconventional oil and gas assets.

A recent report by PFC Energy, the consultancy, notes that in the first half of 2010, Asian players spent close to $6bn on assets in North America’s shale gas plays. From the report:

Four drivers stand out in Asia’s recent investment spree: North America is a long-term play. Although Asians emerged on the unconventional gas scene later than Europeans, scale of investment suggests it has a positive long-term outlook for North American gas prices. Shale gas offers an attractive outlet for cash-rich players.  Many Asian companies have emerged over the past few years with large cash balances or have governments that are keen to make substantial investments for equity positions in assets.  Potential to export shale gas via LNG.  Proving up a feedstock position could help Asian importers secure LNG offtake.  Only the Canadian shale gas plays offer reserves potential and geographic proximity to premium-priced Asian markets. Leverage expertise to other countries. Companies are especially keen to leverage expertise acquired in North America to shale gas opportunities in their home markets.

This is one trend that looks set to last. According to PFC Energy, there are still many opportunities for further investment. Not only do the North American operators face high investment requirements, which more foreign investment can help alleviate. But the operators have been relying heavily on cash and carry-structured joint ventures, and the entrants have been capable of providing such financing vehicles. Asian companies are top contenders for further investment, it says.

The tide on deals in the oil and gas sector, it seems, has turned.

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