Why Energy Deal-Making Activity Is Starting to Pick up Again

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After a deal-making slump in the first half of the year, global energy M&A activity is rebounding in the third quarter, led by a recovery in North American oil and gas asset deals.

According to a report from PLS, a Houston-based research firm, the value of upstream global oil and gas deals came in at $41.8 billion in the third quarter, representing a whopping 59% improvement over the second quarter of this year. North America led the surge in global activity, with companies striking deals worth $15.9 billion during the quarter, up from $10.9 billion in the previous quarter.

The rise of the national oil companies
According to PLS, there are roughly $135 billion worth of global oil and gas assets currently on the market. But unlike in years past, the buyers aren't expected to be U.S.-based exploration and production firms. Instead, they're likely to be foreign national oil companies, which have been scooping up international assets at a blistering pace.

Chinese national oil companies have so far been the largest foreign investors, accounting for roughly a quarter of third-quarter global deals. As China's appetite for oil continues to grow, the nation's state-owned oil companies are aggressively scouring oil-producing assets all over the globe.

Indeed, the biggest deal of the quarter was inked by China National Petroleum Corp. and the Kazakh government, which agreed to sell a stake in Kashagan -- a massive, multi-billion dollar oil project in Kazhakastan -- to the Chinese state-owned oil company for $5 billion. ConocoPhillips (NYSE: COP  ) , the previous owner of the stake, decided not to participate in the costly project, as it continues to sell international assets in order to focus on North American onshore projects.

U.S. oil companies take a different approach
Meanwhile, U.S. energy companies are employing the opposite approach. Over the past few years, many of them spent heavily to acquire shale properties in places like the Eagle Ford and the Bakken. But now, they're focused on unlocking value from those assets, as opposed to purchasing new ones, as they attempt to pay down debt and grow profits.

Chesapeake Energy (NYSE: CHK  ) is one of the best examples. In an effort to narrow its funding gap and raise much-needed cash, the company is targeting $4 billion-$7 billion in asset sales by year-end to help it fund its aggressive drilling program in US liquids-rich plays such as the Eagle Ford and the Greater Anadarko Basin. Despite selling roughly $2.4 billion worth of assets in the second half of the year, the company managed to grow oil production by 44% year over year during the second quarter and is upbeat about future output growth, as it continues to slash costs and improve efficiency.

Similarly, Houston-based Apache (NYSE: APA  ) has been aggressively divesting many of its international assets in an effort to concentrate on growing North American onshore liquids production. Since the start of the year, the company has divested more than $7 billion worth of assets, including the $3.75 billion sale of its Gulf of Mexico assets to private equity firm Riverstone Holdings -- the largest US deal of the third quarter.

The bottom line
After a first-half slump, global and North American upstream M&A activity is showing vital signs of recovery. Foreign national oil companies, led by China, continue to dominate global activity, fueled by a growing mismatch between Chinese oil production and consumption.

Meanwhile, several U.S. exploration and production firms are taking a different approach, opting to sell noncore assets to focus on objectives such as reducing debt, buying back shares, and growing liquids output. As they continue to shed assets, investors can expect the recent strength in oil and gas M&A activity to continue into the fourth quarter of this year.

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