With 2016 in the rearview mirror, M&A activity clearly showed confidence returned to deal makers as transaction value spiked by 111% compared to 2015, according to a Jan. 24 PwC US report.
Last year deal spending reached $21 billion in shale plays, a 166% increase from 2015.
But 2016 was clearly the year of the Permian, where A&D commanded 66% of last year’s deal value. “Deals done relied on the old real estate mantra: location, location, location,” the report said.
M&A could pick up further in 2017 and is off to a brisk pace. With a week remaining, January generated at least $14.8 billion in announced E&P deals.
Analysis shows that E&Ps are more susceptible to public M&A during midcycle upswings, said Scott Hanold, an analyst at RBC Capital Markets LLC.
“Larger deal activity could pick up if oil prices can sustain $55-$60 per barrel,” Hanold said.
The Permian was the most active shale basin in 2016 with 24 deals valued at $13.8 billion, followed by the Marcellus with 13 deals worth $6.8 billion. All other shales had single-digit transaction activity that combined for $11.2 billion.
PwC only includes deals of at least $50 million in its analysis.
Newly added rigs and improved production techniques continue to boost the attractiveness of shale, PwC said.
To close out 2016, upstream deals led activity in the fourth quarter with 34 deals or 56% of the total deal volume. Upstream transactions accounted for $20.2 billion, or 24% of the quarter’s deal value.
Shale deals made up 30 of the 61 deals announced in the fourth quarter.
“On a year-over-year basis, upstream deal value shot up 107% in the fourth quarter, while year-year-over over-year volumes increased 62%,” PwC said.
Other sectors also showed strong deal activity.
The oilfield services segment generated 10 deals worth $29.6 billion in its most active quarter since fourth-quarter 2014.
While midstream value declined 35% in 2016, deals in the sector totaled $84 billion. Midstream deals’ value in the fourth quarter was 195% higher yoy, driven by the announcement of three megadeals of at least $1 billion in the segment.
Such large-scale deals comprised 73% of 2016’s deal value, PwC said.
Oil and gas M&A improved significantly as the year progressed, with tepid first and second quarters leading to a breakneck second half.
“Risk aversion gave way to increasing risk tolerance. Valuation gaps were bridged. Capital availability increased significantly as the high yield debt and IPO markets opened and private equity stepped into senior lending positions traditionally undertaken by banks,” the report said.
Expectations for increasing economic growth and a relaxed regulatory regime are fueling signs of life in the oil patch. The firm anticipates 2017 will see robust M&A and IPO activity.
“Sustaining demand, the elections, [the] OPEC agreement and, finally, an energy executive nominated as secretary of state have all given a boost to the industry,” said Seenu Akunuri, PwC US oil and gas valuation practice leaser. “Although it is too early to tell of the long-term impact, these signs have had a positive impact on business and asset valuations.”
The recovery in commodity prices allowed companies to arbitrage their rising share prices and fund acreage acquisitions, while private companies used the IPO market and others emerged from bankruptcy.
“The activity in the Permian in particular has given new hope to the U.S. shale industry, and 2017 looks like a very promising year,” Akunuri said.
Darren Barbee can be reached at email@example.com.