Midstream dominates US energy M and A

The segment fuelled much of the remarkable boost in activity recorded during the last quarter by contributing 70% of the total.

While the midstream sector accounted for only 14 of the 51 US energy M&A deals completed in the third quarter of 2015, infrastructure-related transactions served as the sector's growth engine by accounting for $63.5 billion of the $91.2 billion total, according to a report by PriceWaterhouseCoopers (PwC).

The uptick compared to the $38.8 billion worth of deals recorded in the second quarter of 2015 was achieved amid a slowdown in capital markets, a trend that is expected to continue to drive more mergers and acquisitions in the sector.

“Deal activity in the oil and gas sector was dominated by mega-deals in the midstream segment despite a significant contraction in the capital markets,” said Doug Meier, PwC’s US oil and gas sector deals leader. Four of the seven deals valued over $1 billion realised in the third quarter were in the midstream segment.

“These megadeals are driven by the objectives of gaining the benefit of scale, synergies and expected growth in distributions/dividends at a time when US onshore production levels have started to decline,” Meier said. “Depressed commodity prices, existing leverage constraints and deteriorating availability of debt and equity financing will encourage more companies to merge or sell off assets to strengthen their balance sheets.”

Both overall volume and value – for deals worth more than $50 million – were slightly down compared to the third quarter last year, when 83 deals worth $125.7 billion were completed.

The downstream segment saw the biggest decline, dropping from 12 deals worth $9.4 billion in the third quarter of 2014 to three deals worth $2.9 billion in the three-month period ending September 30, 2015.

The upstream segment showed signs of recovery, with a 50 percent jump in deal volume from the previous quarter, but still remained 36 percent lower year-on-year. One mega-deal meanwhile drove up deal value in the oilfield services segment, which totalled $16 billion compared to $11.1 billion the same period a year ago.

Financial investors set a new record investing in 17 transactions – the highest number of deals in a third quarter in the past decade – worth $4 billion. Of these, 10 transactions were equity commitments totalling $2.7 billion.

“Financial investors continue to work with portfolio companies to shore up balance sheets and seek additional investment opportunities where valuations are attractive,” said Rob McCeney, PwC’s US energy and infrastructure deals partner.

Transactions involving shale plays totalled $29.5 billion, a five percent increase in value compared to the same period last year but a 41 percent drop in deal volume.

The most active shale play in terms of deal volume was the Permian Basin, which attracted seven deals worth $4.1 billion. It was followed by Eagle Ford with five deals worth $2.8 billion. Utica and Marcellus contributed one deal each, but led in overall deal value with one transaction accounting for $20 billion.

“Oil and gas company valuations continue to be depressed as the realisation has set in that we may be at the current commodity price range of $40 to $60 longer than previously expected,” Seenu Akunari, PwC’s US oil and gas valuation practice leader remarked. 

“We expect deal activity to pick up over the next 12 months as the market will see companies with free cash flow and strong balance sheets acquire assets and businesses from motivated sellers.”