After the second-quarter megadeal spike, oil and gas deal activity resumed its downward trend in the third quarter, according to analysis by PwC US.
Total deal volume declined sequentially quarter-by-quarter by 18% and year-over-year by 20%. Total deal value declined to $37.5 billion, down 68% sequentially and 70% year-over-year. The decline reflects growing pessimism about crude oil price outlook and limited access to capital, according to PwC.
While the 2019 third quarter and second quarter each had three megadeals (over $5 billion), the third quarter megadeal value was an anemic $15.8 billion vs. the second quarter deal value of $89.2 billion.
Hilcorp Energy’s acquisition of BP’s Alaska assets for $5.6 billion was the largest megadeal in the quarter, followed by Energy Transfer’s acquisition of SemGroup and Blackstone’s acquisition of Tallgrass Energy LP, each for about $5.1 billion.
Also, for the first time since the third quarter of 2017, the value of asset deals (53% of total value) surpassed corporate deals as companies continue to realign their portfolios to focus on core assets.
Subsector analysis
The upstream segment accounted for much of the deal value in the third quarter and surpassed midstream deal value for the second consecutive quarter.
The upstream segment continued to lead the way with the most volume (21 deals, 58% of total volume) and value ($17.9 billion, 48% of total value) for the quarter.
In the meantime, however, the upstream segment continued to be under pressure from shareholders and investors to maximize free cash flow. As a result, companies are moving to deals to bridge the cash flow gap and improve investor sentiment.
Also, for the third quarter, shale activity was geographically diverse vs. the trend of mainly asset deals in the Permian. Shale activity generated deal value of $24.7 billion, 66% of total.
The midstream segment represented 36% of deal volume and 46% of value in the third quarter. Financial investors continued to invest across the value chain of midstream assets, from gathering and processing to water services, largely due to cash flow visibility associated with the segment.
The downstream segment’s deal volumes remained relatively soft in the third quarter with one deal of $2.1 billion down from three deals worth $5.1 billion in the previous quarter.
The oil field services segment witnessed limited activity in the third quarter as companies continue to struggle with drilling rigs overcapacity and day rate challenges.
Bankruptcies, outlook
Many oil and gas bankruptcy restructurings occurred in 2016, largely attributable to declining prices resulting from increased production. Now, this year is seeing increased oil and gas bankruptcy restructurings again because of depressed prices and companies’ inability to keep current on debt payments from prior debt restructurings.
The 2019 oil and gas bankruptcy filings have seen a concentration in the upstream sector.
Traditionally, the fourth quarter has seen either an increase in volumes or values as deal makers rush to close transactions prior to yearend. Whether that historic trend is enough to offset the general downward slope of O&G deals in 2019 remains to be seen, PwC noted.