Q3 US upstream deals down 40% from Q2, clock in at $11.4 billion

US upstream deal value came in at $11.4 billion in the third quarter, down 40% from the $20.1 billion in upstream deals during the second quarter and far below the high-water mark of $25.5 billion during the first quarter. Driving the decline was a remarkable slowdown in Permian deal making, where the total value transacted slid to just $1.3 billion. That is the lowest total seen in the Permian since the first half of 2015 and is down 90% from the $18.4 billion that transacted during the peak of the Permian boom during the first quarter.

Value was split between $735 million in the Midland Basin and $531 million in the Delaware Basin. Midland Basin value was almost entirely from QEP Resources Inc.'s acquisition of property from the Cox family for $732 million. While total transacted value fell, acreage values have remained strong. The $51,400/acre paid by QEP Resources for the Cox family assets is near the top value paid in either basin and not far off the $59,000/acre QEP Resources paid in June 2016 for RKI Petroleum assets in the same area.

Sky high seller expectations for leasehold in the Permian may be one factor in the rapid slowdown of Permian transactions. Buying acreage at these prices leaves little room for error in execution. At the same time, execution risk may be rising as demand for rigs, labor, and sand pushes costs up. In addition, Wall Street sentiment has become more cautious about E&P stocks, making the overnight equity raises that funded much of the Permian boom more difficult. The new focus is less on eye-popping IP rates and rapid growth and more about balance sheet management and investor returns. This affects all basins, but especially the Permian as it is the industry's biggest growth story.

The STACK ended up with top honors during Q3, hitting $4.2 billion in deals. A majority of that value came from the $3.8 billion merger of Silver Run II with Alta Mesa and Kingfisher Midstream. The Bakken saw a surprising resurgence, recording $2.0 billion in transactions. That was the best total for the play since before the oil price crash in 2014. Selling was led by Halcón Resources, which transacted $1.5 billion in Bakken assets to support its earlier Permian buying and future development. In a trend spanning several quarters, Halcón's Bakken assets were snapped up by private equity portfolio companies. Private equity was very active on the buyside during the third quarter, accounting for nearly 50% of acquisitions. On the flip side, private equity only made up 5% of sales.

Outside of the STACK/SCOOP and Bakken, no unconventional play had more than $1.0 billion in value during the third quarter. Instead of concentration in a few hot plays, the market was mostly characterized by geographically diverse buying. Nine unconventional plays recorded at least one deal over $100 million, and a number of notable conventional assets also changed hands. Oil deals returned to favor after a preference for gas in the largest deals of the second quarter. Eight of the top ten deals of the third quarter were for oily assets.

The trends established during the third quarter look likely to carry forward through the rest of the year. Through the first part of the fourth quarter, we have seen a continuation of diversified buying with most deals $200 million or under. Notable recent transactions include Chaparral Energy Inc.'s $170 million sale of EOR assets in Oklahoma and the Texas Panhandle to newly formed Perdure Petroleum. Taking a page out of the playbook of the Permian drillers, Chaparral Energy is selling off non-core assets to sharpen its focus in the STACK, hoping the strong regional focus plays well on Wall Street.

The same approach is being taken by Linn Energy Inc. At press time, the company announced it was selling its Williston Basin non-op assets for $285 million to an undisclosed private buyer. That deal pushed Linn's divestments since emerging from its financial reorganization in February to over 10 and its total proceeds to more than $1.5 billion. At the same time, Linn strengthened its position in the Merge by forming a JV with Citizen Energy II named Roan Resources.

More public operators are likely to continue to focus attention on one or two key plays in order to highlight operational efficiencies on Wall Street. At the same time, private equity is likely to continue to take advantage of tepid buying by public firms to snap up assets, especially in plays like the Barnett, Bakken, and Eagle Ford. An interesting future story will be private equity's execution on these assets to meet investor expectations for timelines and returns on capital. Unlike the recent Delaware Basin boom, companies are unlikely to be able to quickly flip acreage for a price several times their cost. While this latest round of acquisitions may end up ultimately being good investments, patience may be needed to see the returns.

Outside of the US, deal value surged forward during the third quarter with a total of $28.7 billion, including $3.0 billion in Canada. Driving the bulk of the increased value were a number of large deals and spinoffs, including the acquisition right at the end of the quarter of Lattice Energy (a newly formed subsidiary of Origin Energy) by Beach Energy for $1.2 billion. It is typical for the international deal market to be driven by a handful of large deals, making quarterly totals there more volatile and future direction tougher to guess than in the US.