PwC: US oil, gas M&A activity in 4Q lightest in 5 years

Feb. 8, 2016
A "sharp contraction" of crude oil prices and "limited access to the capital markets" in 2015 resulted in the least fourth-quarter merger and acquisition activity in the US oil and gas industry in 5 years, according to analysis from PwC US.

Matt Zborowski
Staff Writer

A "sharp contraction" of crude oil prices and "limited access to the capital markets" in 2015 resulted in the least fourth-quarter merger and acquisition activity in the US oil and gas industry in 5 years, according to analysis from PwC US.

In its quarterly report of announced US transactions with values greater than $50 million, the professional services firm indicated that, during the final 3 months of the year, 42 deals took place with a combined value of $31.6 billion.

Those totals are both down from the 70 deals worth $103.4 billion that occurred in fourth-quarter 2014.

Overall in 2015, 179 deals occurred worth $196.1 billion, a steep decline from the 278 deals worth $304.4 billion in 2014. PwC's US M&A tally is in line with Deloitte's US tally (OGJ Online Jan. 26, 2016).

In Deloitte's report, the global industry in 2015 counted just 379 M&A deals, down from the 709 that occurred in 2014, and 409 and 389 that respectively took place in 2008 and 2009 amid the Great Recession. Total value in 2015 was $286.23 billion, down from $353.97 billion in 2014.

Firms focused internally

"Accelerating declines in oil and gas prices coupled with the closing of the capital markets for oil and gas companies during the second half of 2015 drove management teams to focus on cash preservation," explained Doug Meier, PwC's US oil and gas sector deals leader.

"As oil prices stay lower for longer, cash flow will stay constrained resulting in companies operating in survival mode with a focus on realigning their strategies and business models," he said. "This internal focus resulted in a steady decline in oil and gas deal activity leading to the lowest fourth quarter in 5 years, a period that is typically strong for oil and gas deals.

"While the headlines appear depressing, deal-making opportunities exist for companies with dry powder and who are willing to use their equity as currency for doing deals. Looking at the subsectors, midstream companies, including [master limited partnerships], were hit with a devastating left-right combination of dramatically lower stock [unit] prices and closed capital markets, resulting in a precipitous decline in the fourth quarter midstream deal activity."

Continued investment in the industry during the fourth quarter came by way of financial investors, who counted 14 transactions worth $4.3 billion. Equity commitments from private investors tallied six of the deals, totaling $2.2 billion.

"Throughout 2015, financial investors continued to back management teams and raise capital for both equity and credit investments in the oil and gas space," said Rob McCeney, PwC US energy and infrastructure deals partner. "Financial sponsors are well-positioned to find distressed opportunities and will use positions of weakness to their advantage."

Capital markets constraining

Oil and gas initial public offerings in 2015 plunged to 5 from 23 during the previous year, while follow on equity offerings dropped 17% from the 2014 level. High-yield and investment-grade debt issuances for the year fell 48% and 22%, respectively, year-over-year.

"The drop in commodity prices also shut oil and gas companies out of the capital markets in the fourth quarter," said Joe Dunleavy, PwC's US energy sector capital markets leader. "Right now, the priority for many oil and gas companies is to work with lenders to revise the repayment terms of their debt agreements."

John Bittner, a Houston-based business recovery services deals partner, predicts the industry "will see more bankruptcies and an increase in distressed M&A from corporates who have strong capital cushions and sophisticated [private equity] funds."

The corporate deal tally was 20 worth $22.2 billion in the fourth quarter. For the full year, there were 103 corporate deals totaling $170 billion. There were 22 asset transactions worth $9.4 billion during the fourth quarter. In 2015, 76 asset deals took place valued at $26 billion.

"Market participants are in a state of disbelief at the rate at which commodity prices seem to set a new floor every day," said Seenu Akunuri, PwC's US oil and gas valuation practice leader.

"For M&A activity to resume at a reasonable pace, it will take buyers who are patient and have long-term perspective on the potential value of the assets, while it will take some motivation from sellers who have few other liquidity options and are able to get reasonable value under the circumstances," Akunuri said.

Megadeals plummet

Eight megadeals-deals with values of more than $1 billion each-took place during the fourth quarter, representing $22.8 billion. In the same quarter a year earlier, 12 megadeals occurred worth a total $87.7 billion. In 2015, there were 24 mega deals worth a total $152.5 billion, accounting for 78% of total deal value.

Upstream counted 21 fourth-quarter deals worth $9.7 billion, both down year-over-year from 34 deals worth $15.7 billion. The hardest hit subsector, oil field services deal value plunged to $1.3 billion during the quarter from $41.3 billion in same-quarter 2014.

Shale hit 5-year lows during the fourth quarter, tallying deals 14 valued at $7.9 billion, down year-over-year from 26 deals worth $23.3 billion. In 2015, 59 shale deals took place totaling $53.9 billion, representing a 42% and 30% decrease, respectively, compared with a year earlier.

With five deals worth $1.5 billion, the Permian was the most active shale play during the quarter. One deal apiece occurred in the Bakken, Marcellus, Niobrara, and Haynesville.

Midstream, which headlined activity during the second and third quarters (OGJ Online, Aug. 5, 2015; Oct. 28, 2015), posted 11 deals valued at $9.4 billion, down 42% and 79%, respectively, compared with activity in fourth-quarter 2014.

Downstream saw four fourth-quarter deals totaling $11.2 billion. While the tally was the same year-over-year, value represented a significant increase from the $1.8 billion accumulated a year earlier.