While third-quarter deal value for US oil and gas mergers and acquisitions declined markedly from a strong first half of the year, deal volume increased both sequentially and year-over-year on the backs of strategic and financial investors, according to PwC LLP's latest energy deals report. Meanwhile, activity shifted away from the previously red-hot Permian basin.
The report, which covers deals valued at more than $50 million, indicated that 53 deals were announced in the third quarter totaling $23.61 billion. Volume increased 6% from the second-quarter and 13% from third-quarter 2016, and value fell 36% from the second quarter and 58% year-over-year (OGJ Online, Aug. 27, 2017).
Megadeals, those with value greater than $1 billion, continued the downward slide they began in the first quarter, with seven announced in the third quarter worth $11.74 billion-the lowest share of total deal value and volume since second-quarter 2016.
"M&A activity in the quarter was defined by smaller, bolt-on acquisitions, with portfolio rationalizations driving much of the volume," PwC explained.
Private equity firms accounted for 19 deals valued at $8.95 billion, up both sequentially and year-over-year. Fourteen of the deals were buyer deals, with the upstream segment generating the most interest. Investors appear to be taking advantage of favorable valuations to augment core asset portfolios, the professional services firm said.
"PE activity is expected to remain robust due to the abundance of dry power and a more stable commodity pricing environment," said Rob McCeney, PwC US energy and infrastructure deals partner. "However, the majority of these deals are likely to be smaller, bolt-on acquisitions."
Twenty-nine upstream deals were tallied in the third quarter, representing 55% of the total deals volume. Upstream deals were valued at $10.37 billion, contributing 44% of total deal value.
Three deals worth $1.48 billion closed in the Permian. "We see this shift not as a reflection of problems in the Permian but rather of success, as significant dealmaking in the basin has pushed prices higher than they were prior to the commodity price crash," the report said.
The Anadarko basin generated the most interest with six deals worth $3.94 billion. The Bakken and Eagle Ford each generated five deals worth $4.86 billion and $698 million, respectively, followed by the Haynesville with four deals valued at $1.01 billion. The Utica, Marcellus, and Niobrara each generated two deals.
The 10 midstream deals that took place during the third quarter were 23% lower quarter-over-quarter. While the $7.70 billion in midstream deals was lower both sequentially and year-over-year, four of the seven megadeals in the quarter were in that segment.
The downstream segment experienced its strongest third quarter since 2014. Eight downstream deals were announced valued at $3.58 billion, a 100% quarter-over-quarter increase in volume and a 285% year-over-year increase in value.
"Despite the disruptions of hurricane season in the gulf, downstream deals made a comeback, driven by sustained interest of private equity investors," PwC said. The higher activity also reflected contributions from joint ventures and dropdowns.
Six oil field services deals were announced in the quarter, representing a 50% increase in deal value over the second quarter.
"The third quarter was a steady and productive 3 months in terms of dealmaking in the oil and gas space," PwC said. "We expect more of the same in the fourth quarter. Historically, strategic and financial investors have tended to race to close their deals before the end of the year, making the last quarter of the year traditionally one of the most active."
Noting that many of the factors that contributed to deal enthusiasm at the beginning of the year have started to wear off, such as a more energy friendly regulatory environment, PwC expects several new factors to drive activity in 2018, including the possibility of US tax reform, further increases in interest rates, and more severe weather.
"In addition, global drivers impacting dealmaking include sustained higher commodity prices, the uncertainty of the outcome of the upcoming [Organization of Petroleum Exporting Countries] meeting, and heightened political instability," it said.
