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U.S. E&P Dealmaking at Breakneck Pace During First Quarter

Enthusiastic investors set a torrid pace for U.S. energy dealmaking in the first quarter, breaking the record for first quarter deal values, according to a tally by PwC.

"Pleased by a pro-energy policy agenda taking shape, reassured by the relative steadiness of the price of oil, and encouraged by advances in shale technology, investors entered 2017 with renewed optimism, resulting in a record $73.04 billion in announced deals," said PwC researchers. "This represented a stunning 160% increase in deal value year/year."

In addition, activity in the initial public offerings market escalated, with the anticipated increase in public launches by already escalating in second quarter activity.

According to PwC, 53 total U.S. deals were announced between January and March. The upstream was on a red-hot pace with 32 transactions totaling $36.60 billion -- a 304% increase in deal value and a 68% jump in volumes from a year ago.

"Asset deals predominated this quarter," said PwC researchers. "The tried and true axiom 'location, location, location' rule pushed oil and gas companies not only to seek growth but to rationalize their holdings."

The most active basin was the Permian with 20 deals valued at $21.36 billion, representing a record high.

Researchers had anticipated the year would be strong for dealmaking, but after the record-breaking results, "the question now is, will the momentum continue? Although there is still plenty of dry powder, including the capital of foreign investors who are finally beginning to return to U.S. shale plays, we see a few signs that the tide may be starting to ebb.

"Commodity price declines midway through the first quarter, coupled with declining oil and gas equity indices have given potential buyers reasons to revisit their valuation assumptions."

Global upstream transactions reached $61 billion in 1Q2017, the strongest first quarter in the past decade, according to 1Derrick. U.S. upstream dealmaking totaled about $23 billion, on par with activity in the last half of 2016. Five transactions were above $1 billion, and 20 overall were worth more than $100 million.

"Fourteen of the top 20 U.S. deals were transacted in the Permian Basin, including the three largest," 1Derrick said. ExxonMobil Corp. was the top buyer with its $6.6 billion acquisition of assets in New Mexico, followed by Noble Energy Inc.'s $3.2 billion takeover of Clayton Williams Energy Inc. and Parsley Energy Inc.'s agreement to pay $2.8 billion for Double Eagle Energy Permian LLC acreage. For deals valued above $100 million in the Permian, nine were in the Delaware sub-basin and five were in the Midland.

"Permian deals continued to dominate the U.S. M&A market, reaching a new quarterly record at $17 billion in deal value," said 1Derrick Managing Director Ajit Thomas. "Buyers were clearly scrambling to get their hands on what they could in the best tight oil play in the world before all opportunities got taken up."

Adjusted for the value of production, the metrics for undeveloped acreage in the Delaware touched a high of $35,000/acre in Marathon Oil Corp.'s $700 million acquisition of Black Mountain Oil & Gas acreage in West Texas. The acreage metric for deals focused on Reeves County, TX, ranged from $28,000/acre to $32,000 in the first quarter. Midland land saw a high of $38,000/acre in the Parsley-Double Eagle deal.

While the acreage metrics were high, they did not cross the peaks of $46,000/acre in the Delaware through the $2.4 billion RSP Permian Inc.'s Silver Hill Energy Partners LLC deal in October, nor the $58,000/acre in the $600 million QEP Resources Inc.'s RK Petroleum Corp. deal for Midland land last June.

Private equity (PE) was involved in about half of the top 20 deals in the U.S. upstream, with most monetizing assets in the Permian and buying into the Eagle Ford Shale. Among the most significant PE divestitures were Post Oak Energy Capital exiting Double Eagle and BC Operating; Riverstone Holdings exiting Carrier Energy and Trail Ridge Energy Partners II. On the buy side, Blackstone Group LP and Sanchez Energy Corp. paid $2.3 billion for Anadarko Petroleum Corp.'s Eagle Ford portfolio.

"Private equity became active," said 1Derrick COO Mangesh Hirve. "Internationally, deals crossed the finishing line with transaction structures that included payments contingent on milestones and oil prices and kept some decommissioning liabilities with the sellers."

On the international side, Canadian transactions totaled $25 billion in 1Q2017, about 65% of the $39 billion total, with two mega oilsands transactions leading the way. ConocoPhillips divested oilsands and Deep Basin gas assets to Cenovus Energy Inc. for $13.3 billion, while Royal Dutch Shell plcsold bitumen projects to Canadian Natural Resources Ltd. for $8.5 billion.

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