No merger and acquisition wave for upstream oil and gas companies has materialized the wake of Occidental Petroleum Corp.'s multibillion-dollar megadeal for Anadarko Petroleum Corp., but midstream deals continue ramp up compared to 2018, S&P Global Market Intelligence data shows.

Stripping out the Occidental purchase from upstream oil and gas M&A numbers this year reveals a total upstream deal value of just over $12 billion, a 50% drop in value when compared to January through May 2018, according to the data.

After subtracting conversions from master limited partnerships and corporate reorganizations, midstream oil and gas M&A deal values nearly doubled to $27.8 billion in the first five months of 2019 compared to the same time in 2018, the data showed.

Deals for oil and gas pipelines, processors and storage operators — and their increased value — have been largely fueled by private equity money looking for a home in stable infrastructure plays, a number of analysts said. Five of the six largest midstream M&A transactions year-to-date involved private equity buyers. IFM Investors Pty. Ltd.'s recent acquisition of Buckeye Partners LP for over $11 billion took first place.

"If public midstream continues to trade this cheap, private capital is going to take somebody out," Tortoise Capital Advisors energy portfolio manager Matt Sallee said on his firm's podcast May 14. The private equity money backing the Buckeye transaction is a cash infusion into the sector, and that money is "cash that needs to be redeployed into other midstream names."

MLP expert and portfolio manager Hinds Howard expects that midstream M&A deals will continue at a stepped-up pace as large pools of private infrastructure capital flow into Permian Basin pipelines and into processing and crude oil export projects. 2018's wave of MLPs converting into C-corps makes M&A deals easier by removing the stumbling block of incentive payments to the general partner operating the business, Howard, who works for CBRE Clarion Securities LLC, said May 31.

Private equity buyers are also willing to pay more than their public peers, MUFG Securities America Inc. midstream analyst Barrett Blaschke said May 31. "It has become relatively commonplace for financial buyers, which have been aggressively trying to acquire assets, to step in at multiples that simply aren't economic for the strategic players," Blaschke told his clients May 20. "With no visible end to the availability of dollars from private equity players, we see it as likely that acquisition multiples will remain high for some time."

Dealmakers still appear skeptical of the upstream exploration and production side of the business, where even the depressed stock prices of some shale drillers have failed to tempt buyers in 2019.

On the surface, the nearly $70 billion in upstream deal value this year is more than twice the value of 2019's midstream deals year-to-date and almost triple the value of upstream deals in the first five months of 2018. But taking out the Occidental-Anadarko megamerger leaves just over $12 billion worth of deals, 50% less than the first five months of 2018 and less than half of the money being spent in midstream in 2019.

There is no current appetite among corporate buyers to spend cash or stock on anything other than shareholder returns and debt repayment, analysts said. Exploration and production companies are continuing to trade at "steep discounts" to five-year average multiples, making companies "hesitant if not vehemently against" using their funds to buy assets, SunTrust Robinson Humphreys Inc. oil and gas analyst Neal Dingmann told his clients May 20.

"Maintaining low leverage remains a mantra investors continue to put focus on. We expect large-scale M&A to remain fairly muted over the coming quarter," although higher futures prices for oil and natural gas could change that equation, Dingmann said.

Upstream analyst Mark Lear with investment bank Jefferies LLC sees upstream's outlook as persistently gloomy and unlikely to swing in favor of accelerating M&A activity.

"Sentiment feels much the same as it did last week, perhaps a little worse," Lear told his clients May 31. "Another week of uninspiring crude inventories, another major pouring water on the dying flames of M&A hopes, an activist calling out the merits of the transaction that fanned those flames originally, and a failed proxy battle staked on corporate governance, management compensation and everything else that ails E&Ps."