PwC US report: Oil & gas M&A activity at lowest 4Q levels in five years

Mergers and acquisitions (M&A) in the US oil and gas industry reached the lowest levels of fourth-quarter deal activity in five years in terms of both deal value and volume, according to PwC US. The sharp contraction of oil prices and limited access to the capital markets led corporates to make strategic decisions preserving cash, resulting in a challenging M&A environment.

(Shutterstock/Egorov Artem)

During the final three months of 2015, there were 42 oil and gas deals (with values greater than $50 million) accounting for $31.6 billion, compared with 70 deals worth $103.4 billion in the fourth quarter of 2014, a 69% decline in total deal value. In 2015, there were 179 deals worth $196.1 billion, a decrease from the 278 deals worth $304.4 billion in 2014.

Doug Meier, PwC’s US Oil & Gas Sector Deals Leader, said, “Accelerating declines in oil and gas prices coupled with the closing of the capital markets for oil and gas companies during the second half of 2015 drove management teams to focus on cash preservation. As oil prices stay lower for longer, cash flow will stay constrained resulting in companies operating in survival mode with a focus on realigning their strategies and business models. This internal focus resulted in a steady decline in oil and gas deal activity leading to the lowest fourth quarter in five years, a period that is typically strong for oil and gas deals.

“While the headlines appear depressing, deal-making opportunities exist for companies with dry powder and who are willing to use their equity as currency for doing deals. Looking at the subsectors, midstream companies, including MLPs, were hit with a devastating left-right combination of dramatically lower stock (unit) prices and closed capital markets, resulting in a precipitous decline in the fourth quarter midstream deal activity.” 

Financial investors continued to show interest in the oil and gas industry with 14 transactions worth $4.3 billion, or 33% of the total announced deals in the quarter. Equity commitments from private investors accounted for six of these 14 financial deals worth $2.2 billion in the fourth quarter of 2015.

“Throughout 2015, financial investors continued to back management teams and raise capital for both equity and credit investments in the oil and gas space,” said Rob McCeney, PwC US Energy & Infrastructure Deals Partner. “Financial sponsors are well-positioned to find distressed opportunities and will use positions of weakness to their advantage.”

There was a significant drop in oil and gas IPOs in 2015, which totaled five compared with 23 the previous year, while follow-on equity offerings decreased by 17% when compared with 2014. High-yield and investment grade debt issuances for the year decreased by 48% and 22%, respectively, compared with 2014.

Joe Dunleavy, PwC’s US Energy Sector Capital Markets Leader, said, “The drop in commodity prices also shut oil and gas companies out of the capital markets in the fourth quarter. Right now, the priority for many oil and gas companies is to work with lenders to revise the repayment terms of their debt agreements.”

John Bittner, a Houston-based Business Recovery Services Deals Partner. said, “We will see more bankruptcies and an increase in distressed M&A from corporates who have strong capital cushions and sophisticated PE funds.”

For deals valued at more than $50 million, corporate transactions represented 20 deals totaling $22.2 billion in the fourth quarter of 2015. For the full year of 2015, there were 103 corporate transactions that contributed $170 billion. Asset transactions totaled 22 deals, representing 52% of total deal volume. Deal value for asset transactions reached $9.4 billion, accounting for 30% of total deal value in the fourth quarter of 2015. For all of 2015, there were 76 asset deals worth $26 billion.

"Market participants are in a state of disbelief at the rate at which commodity prices seem to set a new floor every day,” said Seenu Akunuri, PwC’s US Oil & Gas Valuation Practice Leader. “For M&A activity to resume at a reasonable pace, it will take buyers who are patient and have long-term perspective on the potential value of the assets while it will take some motivation from sellers who have few other liquidity options and are able to get reasonable value under the circumstances."

In oil and gas segments:

  • There were 11 midstream deals, contributing $9.4 billion in value, a 42% decrease in deal volume and a 79% decrease in deal value compared with the fourth quarter of 2014.

  • The upstream segment saw a drop in total deal value and volume, accounting for 21 transactions representing $9.7 billion, compared with 34 deals worth $15.7 billion during the same period in 2014.

  • Oilfield services deal value decreased to $1.3 billion from $41.3 billion when compared with the fourth quarter of 2014. 

  • There were four deals related to the downstream segment, contributing $11.2 billion, compared with six deals worth $1.8 billion in the fourth quarter of 2014.

According to PwC, total deal volume and value related to shale plays reached five year lows in the fourth quarter of 2015. There were 14 deals with values greater than $50 million, totaling $7.9 billion in the quarter, compared with 26 deals accounting for $23.3 billion during the same period in 2014. For all of 2015, there were 59 shale deals that contributed $53.9 billion, or a 42% decrease in deal volume and a 30% decrease in deal value when compared with full-year 2014.

The most active shale play for M&A with value greater than $50 million during the fourth quarter of 2015 was the Permian Basin, which had five deals worth $1.5 billion. The Marcellus, Niobrara, Bakken, and Haynesville shale plays each generated one deal.

PwC notes that, during the fourth quarter of 2015, there were eight mega deals (with values greater than $1 billion) representing $22.8 billion, compared with 12 mega deals worth $87.7 billion during the same period in 2014. In all of 2015, there were 24 mega deals worth $152.5 billion, accounting for 78% of total deal value.

PwC’s Oil & Gas M&A analysis is a quarterly report of announced US transactions with value greater than $50 million analyzed by PwC using transaction data from Global Data.


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