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Upstream M&A lagging despite oil, gas execs' expectations for consolidation


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Upstream M&A lagging despite oil, gas execs' expectations for consolidation

Oil and gas executives are optimistic that M&A activity will accelerate soon, but the ball has yet to start rolling in the exploration and production segment.

In response to a survey from A.T. Kearney, 97% of executives from across the industry said they expect M&A activity in 2017 to either stay "stable" or increase. More than two-thirds of those surveyed said they expect an increase of 10% or more.

In a conversation with S&P Global Market Intelligence on the study's results, Kearney principal Brent Ross said the stubborn bid-ask spread that limited dealmaking activity for several years finally began to shrink in 2016. "For a long while, we had companies looking to be paid $85 a barrel or more for their assets. Last year, when we saw prices steady, those expectations evaporated, so the bid-ask spread has come together," he said.

The results of the survey also signaled that upstream companies, perhaps still gun shy from the effects of the multiyear price collapse, have been hesitant to get back in the M&A game. "We started to look at the sector information. … Upstream still hasn't recovered as the rest of the sector has," Ross explained. "A lot of the M&A activity has been driven by midstream and MLPs."

That outcome was not one that was expected when the group began its survey, he said. "To be honest, we were scratching our heads on this," Ross said. "Two-thirds [of respondents] expected more activity and were more optimistic. We saw a lot of activity in the fourth quarter last year, but then it slowed coming into this year. Costs have come down in terms of E&P, so that should be a condition with the optimism, but we haven't seen it yet."

Domestically, the vast majority of the upstream M&A activity has been contained to one region.

"Stateside, it's a lot of moves in the Permian," Ross said. "I was hearing about the STACK [formation in Oklahoma] last year, but haven't heard a lot this year."

The impact of Hurricane Harvey on the industry, particularly in and around Houston, could also have slowed down upstream M&A activity.

"I would have said I was optimistic [M&A activity would pick up in 2017] before Harvey, but it seems like it's taken people and refocused them on operations, getting things back online," Ross said. "I think that's shifting some attention from M&A to making sure product is flowing."

Even though M&A activity upstream is not matching optimism, Ross said he anticipates the optimism will eventually lead to movement. "Early next year would be a good idea [for a surge]," he said. "It feels like there is pent-up demand, and when things get back to normal, we may see it."