Global oil and gas mergers and acquisitions activity rose in 2016 against weak commodities, with deal count and deal values higher than 2015 levels, according to a recent report from Deloitte.
Significant megadeals and sectoral swings pushed the bar. In 2016, the industry saw seven deals valued at more than $10 billion—the highest ever. Midstream overtook the upstream business for the first time in terms of deal value, while the 2016 deal value in oil field services and downstream was at record-high levels.
“In all, 2016 turned out to be far better than many expected, and it seems that oil, gas M&A activity has passed its own low point of 2015,” the report said.
Upstream activity
Upstream M&A activity had a tough start in first-quarter 2016 but gained momentum and exceeded 2015 activity in terms of value. Small-to-medium-sized companies, together with large pure-play E&P’s and integrated oil companies, drove up activity.
Countrywide, the US remained the topmost regions and saw a 100% year-over-year increase in deal value to $60 billion in 2016. Russia made a strong comeback in 2016 after few years’ hiatus.
Upstream deals remained subdued throughout the beginning of 2016 with buyers sticking to “producing” assets rather than “fields under development.” However, in second-quarter 2016, buyers, pushed by commodity price confidence, started buying riskier underdeveloped and nonproducing assets.
The largest acquisition of undeveloped US assets was Diamondback Energy Inc.’s purchase of acreage in the Delaware basin, part of the biggest oil-heavy Permian basin, from Brigham Resources LLC for $2.4 billion in December 2016. The oil-heavy Permian basin accounted for 45% of these deals and drove the shift towards nonproducing assets. Second after the Permian was the Eagle Ford, with less than 5%.
Activity in gas-heavy basins remained stagnant with some uptick in Marcellus and Haynesville towards the end of the year.
Primary and secondary equity issues were strong in 2016. Total issuance by US E&P companies nearly doubled to roughly $32 billion last year.
Oil field equipment, services
The oil field equipment and services business saw the largest deal value of all subsectors while simultaneously taking the hardest hit in the current downturn.
Oil field services firms saw very low M&A activity in last year’s first 9 months but overall deal value in 2016 was twice that in 2015, with two megadeals—GE-Baker Hughes Inc. and Technip-FMC—accounting for more than 90% of total transaction value.
With weak, delayed volume and margins growth expectations, buying rationale changed with companies looking for complements to their portfolio of services vs. economies of scale. This approach was evident—nine of the top 10 deals in the sector were between players with little or no direct overlap in the top-revenue generating segments.
Midstream
According to the Deloitte report, the midstream sector’s deal activity surpassed upstream for the first time and became the biggest subsector with deal value at more than $140 billion in 2016.
Size remains the biggest selling point for midstream activity throughout downturns. Two of the largest deals came from Sunoco Logistics’ $51 billion acquisition of Energy Transfer Partners and Enbridge’s $46.5 billion acquisition of Spectra Energy.
Around 80% of midstream deals were asset-based. Three of the five top deals occurred outside of North America. A Brookfield-led consortium’s purchase of 1,700 miles of Petrobras’s gas pipelines in Brazil for $5.2 billion was the largest asset deal.
Three of the five top deals in North America involved utilities as buyers, with Southern Co. and Consolidated Edison buying midstream to expand their natural gas pipelines.
As noted by the report, midstream growth in the US was overall driven by a need to enhance connectivity out of growing basins with gathering and processing networks. Gathering and processing constituted over 40% of total asset deal value.
“However, a year-over-year comparison of gathering deals suggest that buying switched heavily toward natural gas gathering, compression, and processing infrastructure in 2016, probably a consequences of oil drilling cuts in most major basins by upstream producers. Only two out of 12 gathering deals in 2016 were specifically for crude oil.”
The future prospects of the US midstream industry are closely tied to upstream drilling, which is most recently concentrated in the promising Delaware and Midland basins in the Permian and the STACK and SCOOP plays in Oklahoma.
“A recovery upstream environment, continuing regulatory approval and environmental clearance issues associated with new midstream projects, and a growing imbalance in infrastructure in select basins seems to set favorable conditions for consolidation of midstream assets worldwide.”
Downstream
The downstream business saw stagnant deal activity in 2016 but deal value rose by more than 50% year-over-year, reaching $36.5 billion. About 85% of transactions by deal value occurred in the second half of the year against rising commodity prices.
North America accounted for 46% of the deal value in 2016. The deals in the region were primarily aimed at the relatively stable retail and marketing business rather than the buying of light oil-centric distillation and export-oriented storage and terminal assets, a trend that was prevalent in 2015.
Tesoro’s acquisition of Western Refining for $6.4 billion was the largest deal in the region. Asia saw big changes in downstream M&A activity. Rosneft and Trafigura’s purchase of Essar Oil for $12.9 billion was a strategic move to secure upstream supplies and open-up new trading opportunities.
