Deloitte: Industry exercises caution with M&A, though trend is changing

2/15/2018

NEW YORK -- Deloitte forecasts that although the oil & gas industry may be in love with the recent rise in commodity prices it is still exercising some caution when it comes to M&A activity, but that is changing.

Firmer prices plus the remarkably successful OPEC, non-OPEC production constraint program, are giving the industry more confidence heading into 2018, which will lead to more openness to deals.

According to Deloitte’s “Oil & Gas Mergers and Acquisitions Report – Year-end 2017: Working Under Pressure,” investors' demands for capital discipline last year drove M&A activity as companies looked to optimize portfolios by divesting non-core assets and focus on consolidation. While M&A activity started strong in first quarter in 2017, it experienced a sequential decline in deal counts and deal value with each passing quarter.

Given the improved financial environment, Deloitte see two main drivers influencing the outlook for 2018: 

Smaller companies are a bigger deal. More focused and smaller companies now have the cash to pick up those diverted assets, which will drive transaction activity considerably over the next 12 to 18 months and will bring more basins back into fashion, with deals likely returning in the North Dakota, Bakken, Oklahoma and mid-continent. And increased activity means potential growth in pressure pumping.

HIGHLIGHTS

Global deal count and total value declined in 2017

  • Deal counts and values in 2017 were lower than 2016 levels; consolidation and optimization were the major drivers of deal flow in 2017.
  • Upstream saw a significant decline in Q1 2017 M&A activity, most notably in the Permian basin.
  • Consolidation continued to drive oilfield service M&A activity as companies looked to rationalize capacity and pursue opportunities for organic growth.
  • 2018 could see returning confidence and in turn increased deal flow if global crude stocks continue to decline and industry investment rises.

Upstream

  • Large E&P companies have divested non-core acreage and are focusing more on existing locations and assets where they have the comparative advantage.
  • The annual number of upstream deals was half of what it was in 2016, indicating more money spend on fewer acquisitions.

Three Major Themes for 2017:

1)      Continued Portfolio Optimization

  • Portfolio optimization stemmed from the need for large companies to reduce debt levels and/or focus on a handful of core areas.

o   Hess’s divestments in the North Sea and West Africa

o   Shell’s sale of its Canadian oil sands assets

  • Opens opportunities to achieve economies of scale rather than scope

o   Small buyers with regional focus are likely better positioned to create value in mature assets.

2)      Consolidation

  • Companies could make larger-scale deals to combine portfolios and develop economies of both scope and scale.

o   EQT’s acquisition of Rice Energy ($8.2-billion deal) combined the company’s gas-focused holdings and increased the contiguous acres.

3)      Permian Transactions Slowdown

  • The slowdown reflects the industry’s concern with high deal valuation and the need to drill existing well inventories rather than adding to them.
  • Deal value in the second half of 2017 was only 10% of what was seen earlier in the year.
  • Permian remains expensive and deals were valued close to $60,000 per acre, more than triple most other U.S. shale plays.

Oilfield Equipment & Services (OFS)

Soft demand and significant pricing challenges have led to market consolidation.

  • OFS lacked the few large deals in prior years (GE-BHI) but overall deal count remained above 2015 and 2016 levels.
  • The 2016 trend in OFS focusing on scope versus scale seems to have reversed.
    • Most of the largest deals took place between companies with high levels of operational overlap.
    • Reflects a need to increase service capacity rather than broad cross-segment services.
  • M&A in offshore reflects overcapacity of the market- it continues to face a weak contracting market, an excess of rig availability and limited deepwater activity.
  • Onshore OFS in the U.S. continued to focus on well construction and completion services including pressure pumping and products like sand.
    • DUC well inventory’s consistent rise will likely push hydraulic fracturing companies to remain open for deal making as they look to scale.

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