A change in focus by US oil and gas companies to liquids-rich shale plays has dramatically increased the number and total value of asset-related transactions during the third quarter of this year, PricewaterhouseCoopers said.
The investment trend is predominately driven by a 10-year low in gas prices as companies are hunting for the more profitable pure oil assets, the business advisory firm said.
The three month fiscal period that ended on 30 September had 10 mega deals that were dominated by upstream asset transactions as oil and gas companies pursued oily plays. The most active shale play with respect to mergers and acquisitions transactions was the Bakken Shale in North Dakota, which had six deals valued at a total of USD 4.4 billion. The second most active was the Eagle Ford Shale in Texas, where three deals totaled USD 658 million.
Included in the third quarter shale deals is a Utica Shale transaction worth USD 600 million. The Utica play remains an attractive prospect at the current commodity price because of its higher liquids content, the firm said. However, the Utica and Marcellus shales are relatively immature plays, and if gas prices increased in the short term, there would likely be much more activity at both, the firm said.
“We anticipate the tremendous growth rates in shale oil production to remain in place in 2013 as oil prices remain conducive to exploration and production. Valuations of assets should also remain healthy as demand is high not just for established plays like Bakken and Eagle Ford, but new plays like Barnett, Monterey, and Niobrara,” said Marina Petroleka, Business Monitor International’s head of energy and infrastructure analysis and industry research. “So long as the Henry Hub price remains low, we expect that producers will continue to deploy resources to liquids-rich plays that present much more attractive margins for operators. According to our forecasts, the Unites States will be one of the largest contributors to global oil supply growth next year, and this trend will continue to the end of the decade.”
There were 16 deals with values greater than USD 50 million related to shale plays in the July, August, and September, totaling USD 11.7 billion of total deal value, which is a small decline from the 18 shale-related deals that occurred during the third quarter of last year, and a year-over-year drop from the USD 33.1 billion in total deal value.
PricewaterhouseCoopers said it has observed an upward trend of transactions involving master limited partnerships (MLPs) in the energy industry in the past 2 years. While MLPs have traditionally been active in the midstream sector, the number of upstream MLPs is increasing and capital markets are more receptive to them, the firm said.
There has also been an increase in processing deals in the midstream sector this year as a result of the oil and gas liquids being extracted from shale plays and as companies think through the various scenarios that may play out with exports, the firm said. For deals valued at more than USD 50 million, upstream deals comprised 54% of activity in the third quarter with 21 transactions totaling USD 18.7 billion, or 55% of the quarterly deal value.
“Effects of this structural change in the US energy landscape will eventually cascade into the global markets including downward pressure on crude oil prices, initially reflected in the West Texas Intermediate spot price and more supply of refined products in the global markets. As the US reduces its imports of refined fuels and increases exports, and diversion of crude flows toward the East, as the import requirement in the United States falls,” Petroleka said. “We have been bullish on the outlook for midstream energy companies for the past 18 months and maintain this view as they are the main beneficiaries of higher volumes through the transmission system in North America. A look at the continuous uptrend of TransCanada’s share price and outperformance relative to the S&P 500 Energy Index has reinforced our view.”
Also, more mergers and acquisitions are occurring in the Gulf of Mexico. Five deals in the gulf from July through September had a total deal value of USD 7.4 billion, marking a 2.5-year high for deal value for the gulf, PricewaterhouseCoopers said.
Foreign buyers announced four deals during the period, which contributed to USD 4 billion, compared with nine such deals worth USD 17.6 billion last year.
There were 34 asset deals during the third quarter worth a total of USD 31.4 billion, representing 93% of the quarter’s total deal value. There were 39 oil and gas deals valued at a total of more than USD 50 million accounting for USD 33.7 billion in total deal value, which is a year-over-year decrease from USD 41.1 billion in the total deal value.
Sequentially, the third quarter deal volume was down from 51 transactions in the second quarter, and total deal value increased by USD 4.1 billion. The average deal size increased nearly 50% to USD 864 million compared with the second quarter.