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EY report indicates potential for growing oil, gas M&A market in 2017

After a surge in global oil and gas M&A activity in the second half of 2016, the deal market is primed to keep growing in 2017, EY said in a new report.

M&A transactions jumped from $340 billion in 2015 to $395 billion the next year. The increase was driven by big deals, as total volume for the year was down 27%. "In 2016, we were down, but at the end of the year it picked up," Vance Scott, EY's Americas oil and gas leader for transaction advisory services, told S&P Global Market Intelligence. "December was very active, and it's kept going."

The vast majority of the transactions, EY noted, were in North America. Stabilizing oil and gas prices after the two-year downturn helped tighten bid-ask spreads and persuaded potential sellers that now may finally be the time to get out. "A lot of folks who may have invested at the top of the cycle are seeing an opportunity to get out of some positions. … They may be thinking, 'I've ridden it to the bottom; maybe I can exit and break even or maybe even make a little money,'" Scott said. "Others are looking to get in at the bottom of the cycle, and there may be more upward pressure on the way."

A number of U.S. producers, Scott said, are looking to divest assets in noncore areas while adding ones in locations they think are key to their growth, also spurring M&A activity. That thought process, however, has not always worked out in terms of greater profits.

"We actually did some interesting research where we looked at companies that are pure-play in a basin and companies that are diversified in basins. The returns for the pure-play basin on average were a little bit higher, but not much, and had a lot more volatility," he said. "The ones that were spread across more basins were lower, but the spread wasn't as wide. There are potential gains by being able to focus to leverage your focus and your knowledge … but we did see some players that diversified and outperformed."

EY reported $146 billion worth of deals in the midstream sector, an increase of 29%, even as the total number of deals completed dropped 28%, to 93. M&A activity in this sector also spiked in December 2016, portending a big year in 2017.

"I think there are a lot of good opportunities in midstream, with the firming oil price," Scott said. "The independents can now hedge and drill. If you have a good midstream system with a lot of gathering, there's opportunity here. If you're a bigger [company], you may want to do something by combining with one of the smaller, better players."

M&A activity in the midstream sector, however, could be limited to a few of the more active U.S. regions. "We may see some portfolio rationalization and [potential buyers] really sitting back and looking at which plays are going to be in the money and when," Scott explained. "Some gas plays may rebalance things."

The credit markets, which limited M&A activity by tightening in 2016, appear to be loosening again. "The public markets are buying into the idea that we're at the bottom of the cycle," Scott said. "I believe those markets are going to be there."