Relative price stability bodes well for oil and gas deal-making in 2018 and the Permian basin is expected to continue as the lead target for merger and acquisition activity.
Barring a geopolitical event, oil prices are expected to remain on the high end of the $55-65/bbl range, and price stability is as important to deal-making as a high oil price, said a panel of Gibson, Dunn & Crutcher oil and gas and M&A attorneys in a Jan. 10 webcast.
M&A activity did not reach expected levels in 2016 and 2017, the attorneys said, but activity was steady and trends emerged that are expected to continue in 2018.
Since 2014, 41% of M&A activity involved Permian basin assets. In 2016, the Permian basin accounted for 52% of deals. Deals in the Permian dropped to 37% of total deal activity in 2017, but expect steady activity in 2018 as companies continue selective swap transactions to reap benefits of longer laterals and more profitable fracs, said Michael Darden, partner and member of the firm’s energy and infrastructure and M&A practice groups.
In addition to the Permian basin, expect continued deal activity in Oklahoma’s SCOOP/STACK, as well as in the Marcellus, San Juan, and Eagle Ford basins.
Public equity financings decreased 60% from 2016 to 2017. In 2016, 82 transactions worth $31.7 billion were financed through public equity. In 2017, 36 deals came together to total $10.9 billion. The bond market also decreased from 59 transactions with a total value of $31.4 billion in 2016 to 48 transactions holding a total value of $26. 1 billion in 2017.
Nontraditional financing structures including special purpose acquisition companies (SPACs), “drillco” joint ventures, and private equity (PE) filled the financing gap and are expected to continue.
Since 2014, private equity has raised $100 billion for oil and gas investments. The amount continues to increase and the industry can expect PE financing to remain a key source of capital for M&A activity in 2018.
In the past 12-24 months, “a tremendous amount” of private equity has been raised and earmarked specifically for midstream assets, said Justin Stolte, corporate partner and a member of the firm’s energy and infrastructure and mergers and acquisitions practice groups. Private equity firms will work to deploy that capital, but “the opportunity sets will be more finite so premiums may be paid for those opportunities,” he said.
Uncertainties about the reach of bankruptcy court as it relates to gathering and processing agreements between producers and midstream companies likely slowed midstream transaction activity, the panelists said. As many of these cases have worked their way through the system, midstream M&A activity could increase.
Transaction activity among oil field services companies picked up in first-half 2017 but slowed going into yearend. Panelists don’t expect to see consolidation in large-cap oil field services companies in 2018.
