Upstream first quarter deals deliver a positive 2017
Moving into 2017, we projected a stronger upstream transactions market, rebounding from the worst year in recent memory, with oil price recovery and stability. This proved to be the case with deal value climbing 30% to US$172.2 billion, the second strongest performance in the last five years.
A key feature was a very strong first quarter that outpaced other quarters’ average deal value by more than 82%. Canadian players drove the first quarter result by aggressively managing pricing challenges from location differentials and heavy oil.
Although 2017 deal values were up substantially, deal counts were down by 19%, which resulted in the average deal value increasing from US$111 million to US$178 million. Management teams and their boards, particularly those with higher leverage, acted to improve balance sheets, high-grade portfolios and lower equity risk.
North America again led the way with US$94 billion in deal value in 2017 versus US$79 billion in 2016, representing a 19% increase. Key themes were Canadian oil sands consolidation under Canadian ownership, independents consolidating their core basins (primarily Permian, Eagle Ford and Marcellus) and majors extending unconventional positions.
New for 2017 was the European resurgence (excluding the 2015 Shell-BG deal) that was the best performance in over five years at US$27 billion.
Key themes we expect during 2018 include:
- Proven North American shale players that consistently generate cash returns gaining more and lower cost capital to consolidate positions in basins where they have an operating advantage
- Focus on moving offshore and deepwater cost curves that can lower cycle times to access higher rate conventional resources — anticipating that host governments with advantaged resource positions will reconsider their fiscal regimes
- PE activity to increase as several players seek to “cut their losses,” release stranded capital and exit positions taken before the downturn, while other PE players seek creative deals
- The majors to continue to divest non-core late-life assets, and are able to assume additional debt to focus on developments in US and Latin America deal opportunities