A&D aficionados know that even after all the number crunching, earnings calls and whispers from insiders, navigating the way ahead for deals might as well be done with an astrologer’s astrolabe.

Industry watchers at large financial firms variously foresee a run up of activity—or more of the same. Some predict more bankruptcies, others don’t see it happening.

Third-quarter 2015 transactions in the oil and gas sector were powered by midstream megadeals. The upstream sector also saw a rebound with deals in the Permian, Eagle Ford and Utica/Marcellus, PwC said.

Perhaps one certainty as 2016 approaches is that companies will aggressively protect their balance sheets in the coming year.

Increasingly, E&Ps are weighing their asset positions and considering a question best posed by punk rock band The Clash: “should I stay or should I go?”

Some companies, such as Occidental Petroleum Corp. (NYSE: OXY) and Encana Corp. (NYSE: ECA) decided to go in the third quarter of 2015.

In the upstream segment, deal volume was up 50% from the second quarter of 2015. Upstream deals in the third quarter totaled 27 transactions worth $8.8 billion.

However, values were still 36% lower than the same period in 2014, said Doug Meier, PwC’s U.S. oil and gas sector deals leader.

The most active shale plays during the third quarter of 2015 held no surprises. The Permian, Eagle Ford, Utica and Marcellus led the way with deals of $50 million or more.

shale, deals, third quarter, 2015, PwC, Permain, Eagle Ford, Utica, Marcellus

But midstream did the heavy lifting in the quarter. Fourteen midstream transactions accounted for 70% —or $63.5 billion—of overall deal value, Meier told Hart Energy.

Deloitte Consulting LP says the industry’s “wait and see” mode will give way to a ramp-up in deals by the last months of 2015.

Steve Crower, director of the oil and gas team at SDR Ventures, predicts M&A activity will remain flat for now. Companies will continue slimming their portfolios through noncore asset sales, he said.

While companies typically hold on to their noncore assets, in a downcycle “everyone is literally chopping off their arms to stay alive," Crower told Hart Energy.

‘Marginal Stuff’

In the third quarter, Occidental said it had agreed to sell its Williston Basin assets for about $600 million.

During an Oct. 28 earnings call, Stephen I. Chazen, president and CEO, spoke candidly about the position’s value: the Bakken always generated negative cash flow or, at best, neutral cash flow for the company.

Instead, the company decided to sell in a depressed market to use the money in the Permian Basin.

“We just can't see a situation where we would invest in it, given what we have in the Permian,” Chazen said. “So it's really a statement that says, okay, we just don't see how it competes for capital inside the company in any reasonable price scenario that we can come up with.”

E&Ps have taken a significant number of impairments and write-offs, said Seenu Akunuri, PwC U.S. oil and gas valuation practice leader.

Case in point: Encana, which is carefully watching its debt.

In August, the Calgary, Alberta-based company said it would jettison its Haynesville natural gas assets for $800 million.

The Haynesville has “always been marginal stuff and nobody needs money more than Encana,” Crower said.

In addition to its sale of 112,000 net acres in Louisiana, Encana said Oct. 8 it would sell its Denver-Julesburg (D-J) Basin assets for $900 million. Proceeds will be used to pay down debt.

Encana planned to spend more than 80% of its capital on the company’s most strategic U.S. and Canadian assets: the Permian, Eagle Ford, Duvernay and Montney.

Resolute Energy Corp. (NYSE: REN) also recently decided it would part with its Powder River Basin assets in Wyoming for $55 million. The deal followed the May sale of Midland Basin assets in Texas for $42 million.

Akunuri said oil and gas company valuations continue to be depressed as executives realize oil prices may stay at $40 to $60 longer than expected.

“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,” he said.

However, even midstream companies are feeling pressure on their share prices and in the financial markets, suggesting their yearlong A&D spree may be slowing.

Middle Dearth?

Midstream transactions made up 70% of the total overall deal value in the third quarter of 2015. Yet in the third quarter of 2015, the environment started to change for infrastructure companies, Meier said.

“Midstream companies kind of got hammered in two regards, one their share prices or unit prices declined very significantly over the third quarter,” Meier said.

Megadeals are driven by gaining the benefit of scale, synergies and expected growth in distributions or dividends at a time when U.S. onshore production levels have started to decline, he said.

Some companies may target companies that have lower leverage on their balance sheets, potentially reducing the buyers’ overall leverage in the process.

But in the third quarter, midstream ran into tightening debt and equity markets as sources of financing.

Third-quarter transactions had likely been in progress for some time, Meier said. “There’s a lag between when the deal process starts and when the announcement happens,” he said.

Despite the declining market, Meier said midstream opportunities haven’t been exhausted. They’ve just become more expensive due to higher costs of capital.

“We’ve seen in previous downturns that those companies that are stronger players still have the ability access to capital,” he said.

Cheap Bait

Nevertheless, Deloitte questions whether banks will continue their leniency with industry companies during the downturn.

A debate churning among industry experts is whether banks will lose faith in companies or an influx of money will shore up E&Ps.

So far, lenders have been forgiving. But impatient financial institutions might start forcing some highly-leveraged upstream companies into bankruptcy, Deloitte said. Assets would emerge on the market as companies enter restructuring.

“The oil and gas industry players will soon be under increasing pressure to rationalize assets in their portfolios to respond to requirements of debt-holders and to make external adjustments to business structures,” Deloitte said.

The upstream sector will likely be at the forefront since its cash flows are most affected by low oil prices, the firm said.

“Highly leveraged companies will likely be looking to sell assets to survive and in certain situations filing for bankruptcy protection,” Akunuri said.

However, Crower doesn't see a “forest of bankruptcy” in the near future for the industry.

Banks have been "incredibly flexible" with redeterminations so far this downturn, he said.

Of the 40 E&P companies that Wells Fargo Securities covers, 13 companies have seen a mixed reaction from bankers, according to an Oct. 16 report.

The 13 companies either saw some borrowing bases lowered or no change and a couple were increased, said David Tameron, senior analyst with Wells Fargo, in the report.

Overall, the 13 companies now have a cumulative borrowing base of $14.4 billion, down 1% from $14.6 billion before redeterminations.

During the “Great Recession,” it was a different story. As commodity prices took a hit, redeterminations were brutal, especially in 2009, Crower said.

Learning from the past, he said banks have realized that “knee-jerk reactions only make the vultures wealthy.”

“2008-09 was basically a panic—everybody ran for the door—and you’re not seeing that now,” he said.

Crower sees a wave of new money coming into the industry as private equity buyers swoop in to pick up good assets that E&Ps are shaving off at a bargain.

Meier said that for the second quarter in a row, “we saw significant numbers of private equity led equity commitments to the E&P space.”

Private equity investors “love an environment where things are cheap," Crower added.

Emily Moser can be reached at emoser@hartenergy.com, Darren Barbee can be reached at dbarbee@hartenergy.com.