A need for sizable investments to develop and transport new sources of energy is forging the way for an active oil and gas deal market in the United States and around the world, according to a report released Feb. 8 by the Deloitte Center for Energy Solutions.

Roger Ihne, principal, Deloitte Consulting LLP, provided an overall snapshot of how a resurgent North American energy market, buoyed by a plentiful supply of shale oil and gas, is stirring interest in mergers and acquisitions (M&A).

The M&A market has traditionally been driven by exploration and production (E&P) deals, Ihne said. However, that was not the case in 2011. E&P deals were down from robust 2010 models.

“But that was more than made up by a significant increase in the Midstream and all of the deals announced there -- and some very large deals in that area,” Ihne said at a Feb 8. news conference in Houston. “Two of the top three deals for 2011 were actually in the Midstream area, something that we could have never expected and certainly have never seen before. It shows how transformative the market and the industry have become.”

The deal market, after a slow start in the first half of 2011, picked up during the second half of year. In the last six months of 2011 total deal value jumped 29% to $155 billion, compared with $120 billion during the second half of 2010.

The number of deals finalized in 2011 declined to 240, compared with 258 in 2010.

Outside of shale-related activity, the study concluded that a major trend in 2011 was for integrated companies to initiate transactions that allow them to focus on their core businesses.

“We have seen some companies making divestitures in order to maximize shareholder value,” Jed Shreve, principal, Deloitte Financial Advisory Services LLP, said in the report. “Other traditional diversified companies are deciding to split their operations into separate companies, and we believe splits like these will continue to drive M&A activity and be part of a trend toward larger transactions.”

Upstream

The deal value of M&A activity on the E&P side of the business fell to $132 billion in 2011 compared with $173 billion in 2010, a decline of almost 30%, according to the report. The number of E&P transactions last year was 328, compared with 351 in 2010, a decrease of about 7%.

“What’s interesting is when you compare corporate transactions to asset transactions, the majority of decline was in the asset transactions space,” Trevear Thomas, principal, Deloitte Consulting LLP, said at the news conference. “Corporate transactions actually increased from a deal-value perspective. So some interesting twists occurred last year compared to previous years.”

As far as foreign companies entering the U.S. oil and gas markets, JVs were a popular vehicle, Thomas said. “We’ve found that globally -- whether it’s France, China, Japan -- those foreign entities have been successful in the market.”

Private equity firms also are active in the E&P sector, Thomas said, adding, “We are seeing more platform plays by private equity firms where they build up a significant asset base in order to eventually exit via initial public offerings.”

Jim Dillavou, partner, Deloitte & Touche LLP, said he expects to see continued sizable transactions take place among private equity firms. “Firms that have sold their stakes are now looking to re-enter the U.S. energy market. E&P, with lots of properties available, is an area where other buyers can come back in quickly,” he said.

Other Upstream takeaways include:

  • Investors continue to snap up unconventional E&P players as near-term development interest continues to shift focus from natural gas to oil and liquids.
  • Offshore activity is resuming in the Gulf of Mexico, marking the beginning of a return to normal activity levels. Overseas, M&A is focused on deepwater reserves, and continues to be “the E&P game of the future.”
  • As development of unconventional reserves increases, environmental considerations have given rise to an uncertain regulatory environment. Regulatory issues will force cost increases but should not affect overall domestic E&P activity.

Midstream

In 2011, the largest deal in the oil and gas industry took place in the midstream sector -- Exxon’s $41-billion acquisition of XTO, which created the largest natural gas pipeline network in the United States.

While the total midstream deal count for the second half of 2011 was roughly the same as the second half of 2011, several large deals pushed total deal value to $65.1 billion, compared with $5.4 billion during the last six months of the previous year.

“We’re seeing a new wave of midstream activity, which makes sense given the new challenges of getting resources to market in the U.S.,” Thomas said. “Because of the positions of the shale fields, we do not yet have a midstream infrastructure that fully supports the location of E&P activity.”

Key Midstream takeaways include:

  • More than \•10 billion is required to fully develop America’s pipeline infrastructure to meet rising energy production from unconventionals.
  • The need for infrastructure investment and ability to serve the changing needs of customers and producers is spurring M&A activity and consolidation in the midstream market.

The Deloitte report also offered snapshots of the downsteam sector and oilfield equipment and services.

The top conclusions of the Downstream report include:

  • Large integrated companies will continue to initiate spinoffs that will allow them to focus on their core businesses.
  • This change in ownership structure may signal an increase in IPOs in this segment and a corresponding increase in the number of publicly held independent refining companies.
  • Increase in natural gas liquids production is creating a low-cost feedstock for domestic petrochemical producers giving the U.S. a strong economic advantage over international competitors. Refining production exports have increased by 10% from five years ago.
  • North American petrochemical producers have been transformed from the second highest-cost producers of ethylene to the second lowest-cost producers in only a few short years.

The top takeaways for oilfield equipment and services are:

• Oilfield services companies are struggling to keep up with the growing needs of onshore and offshore unconventional domestic E&P.

• They are making acquisitions, not just to gain access to technology or assets, but also to secure the talent and know-how necessary to provide the right services in the right places to effectively deliver to producers.

• Looking ahead, more consolidation is on the horizon for this segment as activity in the service-intensive unconventional resource plays continues to grow. The fundamental outlook for oilfield services companies remains bright.