American oil and gas producers and investors are still striking a lot of deals, but they're now focusing on smaller mergers and acquisitions, extending a trend that began in the first half of 2017, a new report says.
The pattern in dealmaking shows that oil and gas drillers are now focused on getting better results from their wells, following a period of giant deals to acquire land and rival companies. That earlier wave of megadeals came as producers bought up acreage in prime locations in order to drive down costs during a prolonged oil price slump.
"They've swallowed the elephant, and now they need to digest it," said Joe Dunleavy, the head of energy and utilities deals at PwC, the global accounting and consulting firm that put the quarterly report together.
There were 53 deals worth $50 million or more in the U.S. oil and gas sector announced in the third quarter, up 13 percent from last year, PwC said. The total value of those deals was $23.6 billion, down 58 percent.
Meanwhile, megadeals worth $1 billion or more have dwindled since the first quarter of 2017, PwC reports. There were seven megadeals worth $11.7 billion last quarter, the lowest share of total deal volume and value since the second quarter of 2016.
Drillers are now out to prove to their investors and private equity backers that they made the right moves to survive in a world of persistently low oil prices. It's a crucial test for U.S. shale drillers, which rely on expensive extraction methods and are the main force behind a boom in American fossil fuel production.
The exploration and production part of the oil and gas industry continued to drive M&A activity in the sector in the third quarter. It accounted for more than half of the volume and 44 percent of the value, PwC reports.
Drillers focused on buying land adjacent to their existing acreage to create bigger continuous holdings, PwC says. This allows U.S. shale producers to use advanced drilling methods more efficiently.
This trend began to emerge by the end of the second quarter, according to PLS, a Houston-based company that tracks oil patch deals. Drillers that made big purchases in the preceding quarters began using their capital to produce oil and gas from that acreage.
"It was just a natural turn from acquisition mode to execution mode," Andrew Dittmar, senior analyst at PLS, told CNBC at the time.
Energy companies and private equity firms are now looking for deals in shale oil and gas fields beyond the Permian basin, the region in Texas and New Mexico where low-cost production sparked a land rush. Activity there slipped to three deals totaling $1.5 billion in the third quarter.
Buyers turned their attention to the up-and-coming Anadarko basin in Oklahoma and northern Texas, which attracted six big deals worth a combined $3.9 billion. North Dakota's Bakken and the Eagle Ford region in Southeastern Texas both saw 5 deals get done, worth $4.9 billion and $698 million, respectively.
"If you haven't made your mark in the Permian and gotten to scale, then it's going to be too expensive to get there ... so you're going to deploy your capital somewhere else," Dunleavy said.
In the near term, Dunleavy said he expects to see the brisk dealmaking typical of the fourth quarter, as companies hustle to close deals before year end. But looking forward, there is considerable uncertainty for energy deals.
At home, the energy merger market is dealing with the uncertainty of corporate tax reform and rising interest rates. Abroad, there is growing geopolitical tension in oil-producing regions and a question whether OPEC and other oil exporters will extend a deal to limit their output.
"From a deals perspective, we like certainty," Dunleavy said. "We like certainty and we like high prices."