"Strong M&A activity in the U.S. oil and gas sector in the past year is indicative of the 'boom and bust' nature of the industry and a paradigm shift of strategy towards shale," said Michael Collier, U.S. leader of the energy M&A practice at PwC. "As U.S. energy companies continue to showcase true know-how in managing cash flow and making sound strategic investments during times of uncertainty and volatility, we expect to continue to see corporates take leadership, while financial sponsors will begin to make their presence known and come off the sidelines to take advantage of increased interest in the sector. Look for the energy equipment and services sector to heat up in 2011 as companies look to bulk up with people and equipment needed to support shale development efforts."
Average deal size increased 141 percent from $10 billion in 2009 to $24.1 billion in 2010, largely a reflection of major shale gas investments by non-U.S. oil companies looking to play large in the U.S. 'shale gale.'
The final three months of 2010 also proved to be a banner quarter for the oil and gas sector with a total of 49 deals worth $26.9 billion (deals greater than $50 million) – representing an increase of 81 percent in volume and 103 percent in value from the fourth quarter of 2009, which saw 27 deals with a total value of $13.2 billion. The top five deals in the fourth quarter of 2010 were by corporates, indicating companies' focus on 'buy versus build,' using acquisitions to grow their footprint in new geographic markets, and remaining competitive by acquiring new technologies.
"As the climate for business in the Gulf of Mexico continues to remain stagnant due to concerns surrounding the regulatory environment, we expect deal making in connection with the shale plays to out-size deal making in the deepwater Gulf as potential investors assess the still dynamic regulatory climate," continued PwC's Collier.
Liquid content shale plays drove the majority of deal activity with a total of 84 transactions worth $21.6 billion in the upstream sector in the fourth quarter of 2010. By comparison, the midstream sector contributed 12 deals and $3.7 billion, while downstream added 6 deals and $1.2 billion in total value.
According to PwC, there were 5 deals involving the Marcellus Shale with $5.4 billion in total deal value in the fourth quarter of 2010. "We expect the industry's interest in the Marcellus Shale to continue as energy players look to it as a domestic source of long-term energy supply," said Steve Haffner, a Pittsburgh-based partner with PwC's energy practice. "Despite lower natural gas prices in the fourth quarter of 2010, we continue to see corporates entering the Marcellus region for the first time with substantial investments."
Tempering this enthusiasm is the potential regulatory changes driven by environmental concerns. "The industry must be very cautious to avoid any kind of blow-out or spill; all eyes are on the industry to develop the shales safely," added PwC's Collier.
Asset transactions drove the majority of activity during the fourth quarter of 2010 with 89 deals and $19.5 billion in total value. According to PwC, high volume of activity in the exploration and production (E&P) sector also reflects an increased level of interest in shale.
While deal flow in the U.S. related to shale reserves will capture most of the headlines, PwC expects the energy equipment and service companies to continue to invest outside the U.S. to round out their product offerings and increase their presence in key oil-producing regions.
"The Foreign Corrupt Practices Act (FCPA) in the U.S. and anti-bribery statues in the U.K. will be on every energy deal maker's mind as they look outside the U.S. for investments," said Collier. "Fortunately, buyers and sellers alike are developing deep knowledge around anti-corruption policy and the impact they have on deal making. We're seeing high quality pre- and post-deal due diligence work being done to minimize the value impact of possible corruption-related issues."
PwC also expects initial public offerings (IPOs) activity to heat up as players become more competitive in the capital raising environment; however, an increase in IPOs will not derail M&A momentum in the oil and gas sector.
"An open IPO window will help embolden private equity to become a more active player in the sector," said Collier. "However, when it comes to financial sponsors getting into the energy arena, the oil and gas business is very much an 'insider's game' in terms of having technical know-how and a network. Private equity funds that are new to the game will have a very distinct disadvantage and will experience a learning curve, when compared to other, more established players."