Global oil and gas deal activity in 2016 increased 14% from the 2015 level to $395 billion, while deal volume fell 27% year-over-year, according to Ernst & Young LLC's global oil and gas transaction review for 2016. The professional services firm attributes the rise in deal value in large part to midstream and oil field services megadeals.
"Transactions took a back seat to the more urgent task of adapting to new economic realities in the sector last year," explained Andy Brogan, E&Y global oil and gas transactions leader. "A number of deals were initiated but not completed amid ongoing volatility. Now, with the consensus throughout the sector that the worst is behind us, we're starting to see a shift as companies realize that there may be a cost to inaction. We expect to see the momentum that began in the fourth quarter of 2016 continue in the year ahead."
Megadeals, those valued at more than $1 billion, rose 28% year-over-year to 59 in 2016. However, 85 megadeals took place in 2014.
Upstream deal value fell 14% to $130 billion in 2016 compared with the 2015 level. However, when excluding the Royal Dutch Shell PLC and BG Group PLC megadeal in 2015, upstream deal activity improved in 2016. The majority of transactions originated in the US, with record Permian basin deal volumes.
Deal value in North America in 2016 grew 44% from the 2015 level to $76 billion. Activity remained muted in other geographies as buyers and sellers struggled to bridge the valuation gap, E&Y says.
While recent distress is expected have a lasting impact on higher-cost geographies like South America, Africa, and parts of the Middle East and Asia, E&Y expects upstream deal activity to accelerate as portfolio optimization continues and national oil companies (NOCs) experience pressure from cutbacks.
North America dominated midstream transaction activity as well, though continued oil-price volatility slowed the boom in shale infrastructure projects. Deal volume in the subsector in 2016 fell 28% from the 2015 level to 93 deals. Deal value, however, increased 29% year-over-year to $146 billion. E&Y expects a mild resurgence of capital spending in shale and North American petrochemical and LNG infrastructure projects to lead midstream activity in 2017.
Downstream deal value increased 30% year-over-year in 2016 to $65.9 billion, more than double the average annual reported deal value of $28.8 billion in the past 5 years. The subsector saw fewer but larger deals. Two deals valued at more than $10 billion-by Rosneft PJSC and a consortium led by Macquarie Group-represented 36% of this total value. Meanwhile, deal volume declined 17% year-over-year to 131 deals. Activity was led by the US and Europe, representing 66% and 65% of total downstream deal value, respectively.
Looking ahead, E&Y sees 2017 as a stronger year for downstream transactions, with deals motivated by the desire for upstream and downstream integration to create value, a strategy downplayed during the period of high oil prices.
Oil field services showed signs of recovery in 2016 with deal volume declining just 2% year-over-year and deal value increasing 106% year-over-year to $53 billion in 2016. Continued financial stress and overcapacity is expected to drive further consolidation in 2017, E&Y says.
Total reported US deal volume in 2016 fell 37% compared with the 2015 level. Deal value, however, increased 52% year-over-year to $215 billion in 2016. Average deal value increased across all sectors in the US.
