During the past two years, M&A deal value in the U.S. oil and gas industry has mostly been driven by shale transactions in the upstream sector. But during the second quarter of 2012, that trend dissolved as midstream deals sizzled, according to a report by PwC US.

Midstream gathering and processing deals accounted for $15.8 billion, or about 55% of total domestic deal value, in the second quarter of 2012. When compared with the same period last year, midstream deals increased by 200%, according to the PwC report, which was released on July 26. Furthermore, three of the five biggest oil and gas deals in second-quarter 2012 were midstream-focused.

“The second quarter experienced a softening of oil prices and, combined with the continued lows of natural gas prices and the global economic uncertainty, many oil and gas companies started to pull back from new investments in the upstream sector,” said Rick Roberge, principal in PwC’s energy M&A practice.

“Dealmakers put their capital to work in the midstream sector, where they focused on building out the infrastructure to transport, process and store the oil and natural gas extracted from shale plays they previously acquired. We believe that this infrastructure-related build-out will continue to be a focus for the remainder of 2012 and into 2013.”

For the three-month period that ended on June 30, 2012, total deal value for oil and gas transactions that were greater than $50 million reached $28.5 billion. That compares to $23.1 billion during the same period in 2011.

Deal volume in second-quarter 2012 declined slightly to 50 transactions, compared with 55 deals during the second quarter of 2011. Yet, the average deal size increased in second-quarter 2012, escalating 35% to $569 million from $421 million during second-quarter 2011. The increase, according to PwC, was led by seven deals with values of $1 billion or greater.

On a sequential basis, the number of oil and gas deals in the second quarter of 2012 (50) increased significantly from the 33 in first-quarter 2011. Total deal value also increased sequentially, rising from $25.6 billion to $28.5 billion.

Breaking Down The Numbers

Additional statistics produced by PwC’s second-quarter survey include:

? Four downstream deals contributed $2.2 billion in value, while oilfield services added three deals worth $1.2 billion.

? Thirteen corporate transactions had values of more than $50 million during the second quarter of 2012, with a total deal value of $17 billion, or 60% of total second-quarter value.

? Thirty-seven asset deals with combined values of about $11.4 billion.

? About $7.5 billion in total deal value, consisting of 16 transaction worth more than $50 million, were related to shale plays. Included in the shale-related deals were two transactions involving the Marcellus shale totaling $1.6 billion and one Utica deal worth $194 million.

Commenting on second-quarter trends, Steve Haffner, a Pittsburgh-based partner with PwC’s energy practice, said, “During the past few quarters, shale assets were supported by strong pricing of natural gas liquids, but in the second quarter the market saw a drop in NGL pricing, impacting deal activity even further. Now the focus is on the midstream sector.”

For deals valued at more than $50 million, the volume of transactions backed by financial sponsors doubled to 10 deals when compared to the same period last year. Private-equity agreements represented $5.7 billion in total deal value.

PwC also noted that during the first half of 2012, master limited partnerships (MLPs) and private equity acquirers accounted for approximately 95% of conventional natural gas deal value.

“Private equity activity is expanding in all sectors of the energy industry as financial sponsors continue to look for entry points to position themselves to participate in the tremendous expected growth in the U.S. energy space. They also have the ability to exercise the patience necessary to invest in the natural gas business at the bottom of the cycle -- a luxury public companies do not have,” Roberge said.

“They’ve also been active on the sell-side looking to monetize earlier investments, especially in the midstream and oilfield services space. Whether it’s financial sponsors exiting or corporates looking to divest certain non-core assets, sellers in this market need to be well-prepared and ready to provide deeper financial and operational details for a competitive buyer landscape that includes more private-equity firms than ever.”

Foreign buyers had three deals in the second quarter of 2012, which contributed $438 million, vs. 11 deals valued at $6.4 billion during the same period last year.

PwC’s Oil & Gas M&A analysis is a quarterly report of announced transactions in the U.S. with a value greater than $50 million. Transaction data is provided by IHS Herold.