M&A Muted In 2013 As Transactions Decline $86 Billion Globally

North America still owns global oil and gas wheeling and dealing, but 2013 saw buyers continuing to move to midstream as shale deals, especially in gas plays, withered, according to EY’s Global Oil and Gas Transaction Review.

Upstream deal activity in the U.S. dropped as shale gas activity declined, largely a victim of its own success from previous years, said Andy Brogan, EY’s global oil and gas transaction advisory services leader.

Globally, total M&A value declined 21% to $337 billion in 2013, significantly down from 2012’s record $423 billion. Total oil and gas transactions fell sharply to 1,400 from more than 1,800 in 2012 — a decline of 23%.

“The oil and gas sector remains one of the most resilient sectors globally, with an average of four M&A deals per day,” Brogan said. “It has coped reasonably well with an uncertain economic environment for much of the year but has also been impacted by industry specific supply side issues.”

North America remained the center of the deal universe. The continent generated about 30% of upstream transaction value and about 53% of global deal volume.

It dominated unconventional deals, making up 83% of all unconventional focused transactions and 95% of reported deal value.

The U.S. also threw a couple of gigantic deals in the mix, such as Devon Energy Corp.’s (NYSE: DVN) purchase of GeoSouthern Energy Corp.’s Eagle Ford holdings for $6 billion and Fieldwood Energy LLC’s acquisition of Gulf of Mexico producing assets from Apache Corp. (NYSE: APA) for $3.75 billion.

Unconventional resources continue to be a major transaction driver, accounting for 294 transactions with announced deal value of $40 billion. However, the resource base was hit with the same wider decline in M&A spending, with total announced deal value down 39%.

“As well as shale deals declining, 2013 also saw uncertainty over the future oil and gas price trajectories' increase in prominence which probably acted to defer a significant number of transactions,” Brogan said. “As a result, the inventory of assets either officially or unofficially on the market has reached historically high levels.”

U.S. M&A activity for unconventional resources accounted for about 35% of all upstream deals and about 33% of all reported upstream deal value in 2013. Both deals and value were down compared to 2012, but the unconventional share actually moved up from 2012, with deals increasing 29%, and value by 24%.

Oil was king in the U.S., with the lion’s share of transactions. The oil-rich Bakken and Eagle Ford shale again featured heavily in M&A activity, combining for more than $16 billion in activity, more than 40% of the total 2013 announced deal spend in the unconventional space.

However, buyers' appetite for shale gas still hasn’t returned, as depressed regional gas pricing made for a year of indifference.

Gas-prone Marcellus and Utica shales accounted for $4.7 billion in M&A activity, far lower than the $23 billion spend in 2011.

Upstream U.S. transactions also saw fewer deals worth less money. Values decreased by 42%, with deal volumes down 17%. Upstream made up nearly 71% of all U.S. oil and gas transaction volumes in 2013 – higher than in 2012 where this sector accounted for 67%.

Another consistent theme for 2013 U.S. transaction activity was continued investment in the midstream subsector, Brogan said.

Of the 10 largest transactions in the year, five were midstream transactions. Master limited partnerships (MLPs) continued to dominate the transaction scene, given the tax and cost-of-capital advantages of these structures.

Midstream investments were not merely because of deals but also willingness of companies to test the public market. In 2013, the sector was active although total reported deal values were down about 15% and deal volumes down approximately 27% compared to 2012.

One potential contributor is that many private midstream companies are electing to pursue a public offer through a master limited partnership (MLP) IPO instead of selling out. In 2013, there were 21 MLP IPOs, beating the former record of 14 MLP IPOs in a year established in 2007.

In 2014, uncertainty about the global economy, U.S. economic policy and commodity prices, along with potential regulation, will all factor into deals.

“On the positive front, robust current oil prices, solid corporate balance sheets and significant private equity capital targeting oil and gas investments point to strong oil and gas deal flow,” Brogan said. “Additionally, low natural gas prices have spurred investment in gas export facilities in the U.S., and the interest from foreign investors in Asia and Europe remains strong.”