PwC reports record-high US oil, gas M&A deal value for first quarter

Mergers and acquisitions in the US oil and gas industry hit a record value for a first quarter, reinvigorated by steadier oil and gas prices, a new pro-energy administration, and technological advances, according to PwC LLP's latest energy deals report.

First-quarter deal value spiked 160% year-over-year to $73.04 billion as 53 announced deals took place representing a 36% year-over-year increase in deal volume. In January alone, $49 billion in announced deals took place, which was 40% higher than the total for any of the previous first quarters since 2010.

Eleven megadeals worth $62.23 billion were the primary contributor to the increase in deal value. Six of those were in the upstream space, generating $29.3 billion, while the other five were midstream.

The upstream segment remained red-hot with 32 announced deals worth $36.6 billion, year-over-year increases of 68% in deal volume and 304% in deal value.

Shale deals gained further momentum in the first quarter with 28 deals worth $24.62 billion announced. Low-cost production regions with existing infrastructure, particularly the Permian, dominated shale deals. The Permian was most active with 20 deals valued at $21.36 billion-a record high for the basin.

"The first quarter of 2017 was really active, with the Permian proving to be one of the hottest basins globally, attracting even foreign investment," commented Seenu Akunuri, PwC US oil and gas valuation practice leader. "With oil prices hovering around $50/bbl, and Permian economics continuing to improve with breakeven prices plummeting, players in that basin are making just as much margin as they were a few years ago."

The Eagle Ford was the second most active region with five deals totaling $6.85 billion, followed by the Marcellus with three deals worth $292.6 million. The Utica and Bakken recorded one deal each valued at $133 million and $51.4 million, respectively.

"Major players, such as [international oil companies], are changing their strategic portfolio positions, increasing their exposure to onshore acreage," Akunuri said. "This is reaffirming US shale is becoming the swing producer-at the expense of projects in deepwater and Gulf of Mexico."

Midstream dropdowns, reorgs

Midstream deal value was dominated by dropdowns or corporate reorganizations. Fourteen midstream deals were reported in the first quarter, flat sequentially, valued at $34.87 billion, or 47.7% of total deal value. The largest deal in the quarter was a midstream deal, contributing $17.2 billion. Four other midstream megadeals generated $15.7 billion.

Announced deal activity in the oil field services and downstream segments was relatively subdued with four worth $613.8 million, while the downstream segment generated three deals worth $962.16 million.

Consistent with the historic trend, strategic investors generated the majority of activity with 45 deals worth $68.58 billion. However, financial investors remained active with 8 deals totaling $4.49 billion. Private equity volume represented 26% of total deal volume, which was lower both sequentially and on a year-over-year basis.

Preparations for initial public offering also increased sharply during the first quarter, signaling a potential increase in IPOs in the second quarter. "We see a lot of optimism both in the IPO and high-yield markets," said Rob McCeney, PwC US energy and infrastructure deals partner. "Companies are showing interest in entering the capital market and taking advantage of the higher valuations. However, we could run into an expectation gap that could result in tempering the activity in the quarters to come."

Doug Meier, PwC US oil and gas sector deals leader, noted the surge in overall deal activity may have subsided a bit exiting the first quarter. He asked, "Did seller optimism get a little ahead of the market? Did we have a little too much enthusiasm for the recovery and for what the enthusiasm meant for valuation?"