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Fitch: M&A activity increasing, with producers using 'rifle, not shotgun approach'

Mergerand acquisition activity in the oil and gas sector picked up in the secondquarter of 2016 as producers positioned themselves for rising prices, FitchRatings said in a recent report.

Fitchsaid the second quarter's increase in transaction volume seems to be largelydue to improvements in hydrocarbon prices, including the long-awaitedtightening of bid/ask spreads. Capital markets, perhaps surprisingly, alsoremained open to assist. Looking at deals worth more than $100 million, theratings agency said a total of 52 deals, worth more than $30 billion, hadoccurred between the fourth quarter of 2015 and the second quarter of this year.

"TraditionalE&P companies have dominated acquisition activity representing 69% and 76%of total transactions and consideration, respectively," the special reporton U.S. and Canadian E&P deals said. "Corporates seemed to be largelyfocused on improving the size and quality of their core U.S. shale positions,extending/entering into attractive new U.S. shale positions and/or raisingliquidity by selling certain noncore assets. … Financially-backed acquirersseemed to have a more opportunistic focus, with transactions observed across avariety of basins/regions."

Thereport said buyers were using a "rifle, not shotgun approach" intheir acquisitions, making mainly small deals totaling around $350 million.About one-quarter of the activity came in the Permian Basin, which Fitch saidwas likely due to operators looking to improve existing positions and having"relatively strong" capital market access.

ThePermian and Anadarko basins, Fitch said, tended to be areas where sellerstallied totals above the median price in other areas. The ratings service saidthe median price per drilling location in the Permian and SCOOP/STACK playswere $1.5 million and $1.4 million, respectively.

"Thisis likely due to the comparatively stronger return profile of these plays giventheir favorable liquids mix, competitive cost position and promising productionresults. Another consideration is their earlier stage of horizontal developmentproviding operators with an opportunity to deploy recent, more efficientfracking techniques across more drilling locations," Fitch said.