The oil and gas industry may be raising rigs and expanding capital plans for 2018, but some players still appear cautious about building up their portfolios, according to Deloitte.

Firmer prices, an attempt to live within cash flow and the decision last year by the Organization of the Petroleum Exporting Countries, i.e. OPEC, to reduce oil production, have given the energy industry more confidence, according to Deloitte’s report on merger and acquisition (M&A) activity for 2017.

That confidence in turn could lead to more global oil and gas dealmaking, researchers said.

Investor demands led companies to instill capital discipline across their operations last year, and many optimized portfolios by divesting noncore assets and focused on consolidation.

“M&A activity started strong early last year, but it experienced a sequential decline in deal counts and deal value with each passing quarter,” according to Deloitte’s researchers.

However, given the improved financial environment, two drivers may influence this year’s activity: smaller operators may be involved in more offerings, and private equity (PE) may back more midstream pipeline and downstream offerings.

“More focused and smaller companies now have the cash to pick up those diverted assets, which will drive transaction activity considerably over the next 12-18 months and will bring more basins back into fashion, with deals likely returning in the North Dakota, Bakken, Oklahoma and Midcontinent,” Deloitte’s team said. “And increased activity means potential growth in pressure pumping.”

Meanwhile, PE financing is expected to increasingly help the midstream pipeline and processing businesses, which in turn would lead to more takeaway capacity in growth basins. PE financing also is funding the infrastructure buildout required for the rise in U.S. exports of oil, oil product and natural gas.

M&A activity explored by Deloitte is based on data from 1Derrick’s M&A Database as of Jan. 4. The data represent acquisitions, mergers and swaps with deal values of more than $10 million, including transactions with no disclosure on reserves and/or production.

Deloitte’s analysis excluded transactions with no announced value as well as transactions between affiliated companies to provide a more accurate picture of M&A activity in the industry.

Last year, Deloitte said three major themes dominated M&A activity:

For example, Permian deal value in the second half of 2017 “was only 10% of what was seen earlier in the year,” according to researchers.

The monster basin, where there are more rigs and more activity than any other area of the country, also remains an expensive playground. Deals last year were valued close to $60,000/acre, more than triple other U.S. onshore plays, Deloitte noted.

For the oilfield services (OFS) sector, soft demand and “significant pricing challenges” led to more market consolidation last year. The OFS sector lacked mega-deals in 2017, but the overall deal count still rose above 2015 and 2016 levels.

Also, the 2016 trend in OFS, which was to focus on scope versus scale, appeared to reverse, as most of the largest transactions were between companies with “high levels of operational overlap,” traced to increasing capacity rather than expanding cross-segment services.

Specifically in the U.S. onshore, OFS dealmaking “continued to focus on well construction and completion services including pressure pumping and products like sand,” researchers said. The drilled but uncompleted well inventory’s “consistent rise will likely push hydraulic fracturing companies to remain open for dealmaking as they look to scale.”

However, M&A activity in for OFS offshore operators last year reflected continued overcapacity. The offshore continues to face a “weak contracting market, an excess of rig availability and limited deepwater activity.

For midstreamers, deal activity last year was moderate with low values relative to 2016. Most of the activity in the sector was U.S.-based — except for the largest deal, Canada-based Pembina Pipeline Corp.’s takeover of Veresen Inc. for $7 billion-plus.

More stable oil prices this year may generate deals by potential players that have been standing on the sidelines, according to Deloitte.

“Continued execution of divestment plans could provide opportunities for smaller, more regionally focused companies,” while “consolidation and portfolio management across sectors will be key to adapting to the business environment.”

Moody’s Investors Service in January said it expects more strategic M&A this year, “increasingly between larger companies across the oil and gas industry…” Independent E&Ps may be “particularly attractive” to larger independents and the integrated producers.