Mergers and acquisitions may be hopping in general across the country, but the oil and gas exploration and production industry experienced a drop in deals in the second quarter of the year, according to a report out Tuesday by Austin-based industry data provider Drillinginfo.
Drillinginfo findings show only $8.7 billion in U.S. activity during the quarter, versus a quarterly average of $17.8 billion since 2009. By comparison, the industry’s global deal value in the quarter was $165 billion, which is up 58 percent over the previous quarter and 122 percent over the same period last year.
Contributing to the stall in the U.S. are pipeline bottlenecks in the once white-hot market for oil and gas assets in the Permian Basin of West Texas and New Mexico, the firm said. Deals in that area reached just $801 million in the second quarter, the lowest level since the $437 million hit in the second quarter of 2015.
None of that is good news for legal dealmakers in Texas, a big chunk of whose economy is still dependent on the oil and gas industry. The state is the number-one producer of oil and gas in the U.S., according to the Federal Reserve of Dallas.
However, Drillinginfo forecasts that M&A activity in the U.S. oil and gas industry is primed to rise significantly in the second half of the year because of Wall Street’s push for companies to generate positive cash flow, which is spurring oil and gas executives to focus on single basins or core-of-the-core areas – and sell the rest.
Drillinginfo estimates that more than $50 billion worth of U.S. oil and gas deals are in play.
“We expect the logjam in quality asset packages to begin to move quickly in the second half of 2018 as the sub-$50 oil price risk is largely over,” Drillinginfo senior director Brian Lidsky said.
Lidsky expects buyers to run the gamut from private equity firms – which have provided $15 billion in capital to more than 70 management teams since 2017 – to the major oil companies to Asian, European and Middle Eastern players. “These are exciting times and buyers have plenty of choices to rapidly deploy capital,” he said.
Drillinginfo notes BHP Billiton’s pending divestiture of its U.S. oil and gas assets, which is the biggest package on the market. Media outlets have reported that Royal Dutch Shell, BP, Chevron and private equity firms have made bids, but that BP is the front-runner with a $10 billion offer. BHP Billiton is expected to make a decision by year-end.
Among Drillinginfo’s other observations: That the market for royalties and minerals is very strong as this segment rapidly evolves; that shareholder activists have an important and continuing impact on E&P executives’ playbooks; that the bankruptcy wave isn’t over, with Appalachia-focused Rex Energy being the latest large official casualty; and midstream and downstream activity is brisk and should continue that way.
Looking forward, the firm said the prospects are good for more U.S. liquefied natural gas liquefaction projects as LNG demand is forecast to outpace supply from facilities in the works beginning as early as 2020.
Drillinginfo also said to watch for large-scale strategic resource capture transactions, in part to naturally hedge LNG feedstock needs; and for Wall Street reaction to improving oil fundamentals relative to its current underinvestment within the S&P 500 on a historical basis.