The energy sector was a dynamic place to invest in 2011, as the industry buzzed with deal activity as several larger oil and gas companies bought into the onshore United States. The industry also continued the break up trend as some major energy companies felt that a singular focus on one part of the energy complex was the proper strategy to pursue. (To know more about oil and gas, read Oil And Gas Industry Primer.)

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Large Deals
Deal activity continued in 2011, with several non-United States based companies buying their way into the shale and unconventional resource boom underway in the United States. One of the largest deals of the year came in July when BHP Billiton (NYSE:BHP) announced the purchase of Petrohawk Energy in a deal valued at $15.1 billion.

Petrohawk Energy had a large position in the Eagle Ford Shale as well as other properties in the onshore United States. BHP Billiton paid dearly for the company as the $38.75 per share cash offer represented a 65% premium to Petrohawk Energy shareholders.

This was the second major acquisition in 2011 for BHP Billiton, as the company also purchased shale gas assets in the Fayetteville Shale from Chesapeake Energy (NYSE:CHK) earlier in the year for $4.75 billion.

In October, Statoil ASA (NYSE:STO) also bought into the shale boom, offering $4.4 billion for Brigham Exploration Company. The company paid a 36% premium and picked up substantial developed and undeveloped acreage in the Bakken Shale.

Breaking Up
The break up trend continued in 2011 as many integrated oil companies decided to separate through spinoffs or other restructurings. The largest of these was ConocoPhillips (NYSE:COP), which decided to spin off its downstream operations as Phillips 66.

Several other companies completed restructurings during 2011, or are awaiting final shareholder or regulatory approval. Marathon Oil (NYSE:MRO) jettisoned its downstream operations as of June 30, 2011 into Marathon Petroleum(NYSE:MPC), and 2012 will Marathon Oil's first full year as an independent exploration and production company.

Williams (NYSE:WMB) also announced a restructuring and will spin off the company's exploration and production business to shareholders by the end of 2011. The new public company plans to operate as WPX Energy and focus on the development of onshore properties in the United States.

North Dakota Break Out
Although the oil and gas industry has a long and storied history in North Dakota, the state was not traditionally a major focus for exploration and development. The commercialization of the Bakken in the Williston Basin has changed everything for that state, and led to another boom in the region.

Oil production from North Dakota soared during the year, reaching 488,000 barrels per day in October 2011, up from 343,000 barrels per day in January 2011, and just 236,000 barrels per day in January 2010.

Operators active in the Bakken and other plays in North Dakota include Continental Resources (NYSE:CLR), Whiting Petroleum (NYSE:WLL) and EOG Resources (NYSE:EOG).

Returns
Investment returns were not as exciting, however, and probably did not make investors happy in 2011. The SPDR S&P Oil & Gas Equipment & Services (ARCA:XES), which is composed of many oil service and drilling companies, was down 12% through December 20.

The SPDR S&P Oil & Gas Exploration & Production (ARCA:XOP), which is composed mostly of independent exploration and production companies, did slightly better and was flat for the same time period.

The major integrated oil companies did slightly better in 2011. Exxon Mobil (NYSE:XOM), Chevron (NYSE:CVX) and Conoco Phillips were up 11, 13 and 4%, respectively, as many fled to companies perceived as safer by many investors. (Find out how to invest and protect your investments in this slippery sector. For more, see What Determines Oil Prices?)

The Bottom Line
An exciting and dynamic industry does not necessarily make better investment returns, as many of us found out in 2011. We can only hope that the recent obsession with restructurings will help set up the sector for a better 2012. (For additional reading, check out A Guide To Investing In Oil Markets.)

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At the time of writing, Eric Fox did not own shares in any of the companies mentioned in this article.

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