Foreign, private buyers scoop up orphan assets to drive deals

HOUSTON — A drop in megadeals and midstream deals cut in half oil industry spending on mergers and acquisitions during the third quarter, even as foreign and private equity buyers went on the prowl again, according to a report Thursday by PricewaterhouseCoopers.

As the industry trims older, conventional drilling assets in favor of more lucrative shale plays, divestitures drove most of the $16.4 billion in oil and gas deals in the three months ended Sept. 30, a decline from $37.6 billion in merger-and-acquisition activity a year ago.

Oil and gas companies struck 43 deals in the third quarter, down two from the same period last year. The number of deals worth more than $1 billion sank to just three in the third quarter, worth a combined $6.4 billion, the lowest level in seven quarters. The average quarterly value of oil and gas megadeals over those seven quarters was $21.3 billion, according to PwC.

Foreign buyers and private equity players made elbow room at the deal table again after a lull this summer, focusing mostly on exploration and production assets, said Rob McCeney, the U.S. energy private equity deals leader for PwC, in a written statement.

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Those investors “continue to seek orphan businesses from corporate sellers,” McCeney said.

Asset divestitures made up $13.9 billion of the M&A volume in the third quarter, making up the bulk of deal activity in the third quarter, according to PwC. A massive U.S. land grab between 2007 and 2011 left many exploration and production companies with less capital to develop the more costly shale plays.

Now, corporate sellers are often looking to generate extra cash to invest in shale, or deliver capital back to shareholders through buybacks and dividends, said Doug Meier, PwC’s US energy sector deals leader, in an interview.

But shale acquisitions were hot, too. Roughly a third of the capital that buyers spent in the third quarter was aimed at shale assets. The Bakken Shale in North Dakota led the quarter with $1.8 billion in deals, followed closely by the Eagle Ford Shale in South Texas, which garnered $1.7 billion in deals.

Foreign buyers spent a combined $2.8 billion on nine deals in the third quarter, still a decline in value from the $4 billion in four deals struck last year, but a large jump in activity after just one foreign-buyer deal in the second quarter.

Often, international investors are looking for more than just investment returns: They want to soak up intangible assets like technological expertise  and skilled labor from U.S. shale plays, and many have plans to export that overseas to develop assets in their own countries, Meier said.

Meanwhile, private equity-backed firms shook hands on $4.9 billion in six oil and gas deals during the quarter, up from $1.5 billion in the second quarter. Those players, agnostic on what assets they scoop up, look for the highest possible returns at the right price, even if the assets are not in the booming shale plays, Meier said.

Together, the foreign and private investors spent 47 percent of the deal capital in the third quarter.

“Obviously, the common denominator is economic returns,” Meier said.

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