Midstream megadeals dominated U.S. oil and natural gas transactions during the third quarter, despite the slowdown in capital markets, PwC US reported Wednesday.

In total, 14 midstream deals accounted for $63.5 billion, or 70% of overall deal value. During 3Q2015, a total of 51 oil and gas transactions accounted for $91.2 billion, versus 47 in 2Q2015 worth $38.8 billion and 83 in the year-ago period that totaled $125.7 billion. Seven transactions, including four in the midstream segment, were valued at more than $1 billion, which brought in a total of $80.8 billion.

PwC each quarter tracks domestic oil and gas deals valued at more than $50 million. The merger and acquisition (M&A) analysis uses data from Global Data.

“Deal activity in the oil and gas sector was dominated by megadeals in the midstream segment despite a significant contraction in the capital markets,” said Doug Meier, U.S. Oil and Gas Sector Deals leader. “These megadeals are driven by the objectives of gaining the benefit of scale, synergies and expected growth in distributions/dividends at a time when U.S. onshore production levels have started to decline.

“Depressed commodity prices, existing leverage constraints and deteriorating availability of debt and equity financing will encourage more companies to merge or sell off assets to strengthen their balance sheets,” Meir said.

According to PwC, 22 unconventional deals were done during 3Q2015 that totaled $29.5 billion, a 5% increase in total deal value but a 41% decline in volumes from a year ago. The most active shale play for deals was the Permian Basin, with seven worth $4.1 billion. The Eagle Ford Shale contributed five transactions worth $2.8 billion. Although the Utica and Marcellus shales each contributed one deal, the Appalachian Basin led in overall deal value with one deal worth $20.0 billion.

“Companies are focusing on basins that have proven levels of production and making investments looking to shed those assets associated with nonproductive wells,” said John Brady, who leads PwC’s Houston Assurance practice.

No initial public offerings were launched during the period, while follow-on equity offerings declined year/year by 56%. High-yield debt issuances fell by 78%, while investment grade debt issuances dropped by 74%.

“The oil and gas capital markets have slowed considerably, making it more challenging for companies to ride out the current environment,” said Capital Markets Advisory partner Joe Dunleavy. “This reduction in access to capital will add considerable downward financial pressure on oil and gas companies to ensure they have strategies in place to be in a position to succeed now, and once the market rebounds. As we have seen, and as we expect we will see more of, these strategies include bankruptcy.”

The upstream segment recovered from recent lows in the latest quarter, accounting for 27 transactions representing $8.8 billion, an increase of 50% in total deal volume sequentially but 36% lower year/year. Six transactions in 3Q2015 represented equity commitments.

Oilfield services deal value increased to $16.0 billion, higher than $11.1 billion a year ago, driven by one large mega deal by Schlumberger Ltd. to buy Cameron International Corp. for $14.8 billion (see Daily GPI, Aug. 26). In the downstream segment, the total number of deals fell to nine worth $2.9 billion, versus 12 worth $9.4 billion a year ago.

Corporate deals during the third quarter accounted for 25 transactions worth $83.3 billion, versus 26 asset deals worth $7.9 billion. Corporate deals represented 49% of the total deal volume and 91% of the total deal value, which included 10 midstream deals worth $61.3 billion.

Financial investors also continued to prowl for deals, with 17 oil and gas deals during 3Q2015 — the highest number in a third quarter in the past 10 years — worth $4.0 billion. Equity commitments from private investors accounted for 10 of the 17, accounting for $2.7 billion of the total.

“Financial investors continue to work with portfolio companies to shore up balance sheets and seek additional investment opportunities where valuations are attractive,” noted Rob McCeney, U.S. Energy & Infrastructure Deals partner.

Seenu Akunuri, who is PwC’s U.S. Oil and Gas Valuation practice leader, said “valuations continue to be depressed as the realization has set in that we may be at the current commodity price range of $40 to $60 longer than previously expected. There has been a significant increase in the number of impairments of assets and goodwill, and highly leveraged companies will likely be looking to sell assets to survive and in certain situations filing for bankruptcy protection.

“We expect deal activity to pick up over the next 12 months as the market will see companies with free cash flow and strong balance sheets acquire assets and businesses from motivated sellers.”