Midstream Segment Boosts 3rd Quarter Deal Activity, According to PwC US

Posted on

HOUSTON – Megadeals in the midstream segment dominated U.S. oil and gas deal value despite a slow-down in capital markets in the third quarter of 2015, according to PwC US.

In total, there were 14 midstream deals accounting for $63.5 billion in the third quarter of 2015, or 70% of overall deal value.

During the three month period ending Sept. 30, there were 51 oil and gas deals (with values greater than $50 million) accounting for $91.2 billion, compared with 47 deals worth $38.8 billion in the previous quarter, and 83 deals worth $125.7 billion in the third quarter of 2014. There were seven megadeals (deals valued over $1 billion) worth $80.8 billion in the quarter, with four in the midstream segment.

“Deal activity in the oil and gas sector was dominated by megadeals in the midstream segment despite a significant contraction in the capital markets. These megadeals are driven by the objectives of gaining the benefit of scale, synergies and expected growth in distributions/dividends at a time when U.S. onshore production levels have started to decline,” said Doug Meier, PwC’s US Oil. and Gas Sector Deals leader. “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.”

There were no oil and gas IPOs in the third quarter while follow on equity offerings decreased by 56 percent in the quarter compared with the same period in 2014. High-yield and investment grade debt issuances decreased by 78 percent and 74%, respectively, compared with the third quarter of 2014.

“The oil and gas capital markets have slowed considerably, making it more challenging for companies to ride out the current environment,” said Joe Dunleavy, Capital Markets Advisory Partner at PwC. “This reduction in access to capital will add considerable downward financial pressure on oil and gas companies to ensure they have strategies in place to be in a position to succeed now, and once the market rebounds. As we have seen, and as we expect we will see more of, these strategies include bankruptcy.”

Other oil and gas segments:

• The upstream segment recovered from recent lows, accounting for 27 transactions representing $8.8 billion, or an increase of 50% in total deal volume sequentially, but still 36% lower than the same period last year. Six of the transactions represented equity commitments.

• Oilfield services deal value increased to $16 billion from $11.1 billion when compared with the third quarter of 2014, driven by one large mega deal.

• The total number and value of downstream deals decreased to three deals worth $2.9 billion, compared with 12 deals worth $9.4 billion in the third quarter of 2014.

In the third quarter, there were 25 corporate deals worth $83.3 billion vs. 26 asset deals worth $7.9 billion. Corporate deals represented 49% of the total deal volume and 91% of the total deal value, which included ten midstream deals worth $61.3 billion in the quarter.

Financial investors continued to show interest in the oil and gas industry with 17 transactions – the highest number of deals in a third quarter in the past 10 years – worth $4 billion. Equity commitments from private investors accounted for ten of these 17 financial deals worth $2.7 billion in the third quarter of 2015.

“Financial investors continue to work with portfolio companies to shore up balance sheets and seek additional investment opportunities where valuations are attractive,” added Rob McCeney, PwC US Energy & Infrastructure Deals Partner.”

According to PwC, there were 22 deals with values greater than $50 million related to shale plays in the third quarter of 2015, totaling $29.5 billion. This represents a 5% increase in total deal value and a 41% decrease in total deal volume when compared with the third quarter of 2014.

“Companies are focusing on basins that have proven levels of production and making investments looking to shed those assets associated with non-productive wells,” said John Brady, Leader of PwC’s Houston Assurance practice.

The most active shale play for M&A with values greater than $50 million during the third quarter of 2015 was the Permian, which led in activity with seven deals worth $4.1 billion. The Eagle Ford contributed five deals worth $2.8 billion. Although the Utica and Marcellus Shale each only contributed one deal, they led in overall deal value with one deal worth $20.0 billion.

According to Seenu Akunuri, PwC US Oil and Gas Valuation Practice Leader, “Oil and gas company valuations continue to be depressed as the realization has set in that we may be at the current commodity price range of $40 to $60 longer than previously expected. There has been a significant increase in the number of impairments of assets and goodwill, and highly leveraged companies will likely be looking to sell assets to survive and in certain situations filing for bankruptcy protection. 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.”

Find articles with similar topics
, , ,