By the end of 2012, it was clear A&D activity had delivered a blockbuster, with estimates that North America had raked in roughly $120 billion. Then came the sequel, and while no one expected another monster year, 2013 handed in a shaky $41 billion performance. “It was something just short of a flop,” said Bill Marko, managing director of Jefferies & Co.

Transaction value was down two-thirds from 2012 to 2013. From 2009 to 2012, A&D transactions averaged $100 billion before skidding to a halt in 2013, Marko said.

Several factors converged to bring about a collapse in deal value. For one, companies had been stocking up on acreage since 2009. They “had more acreage than they could effectively drill, didn't have the capital or didn't have the appetite to add new acquisitions,” Marko said.

Foreign investors also bailed on North America, with important players, such as Chinese national oil companies, making their largest deals elsewhere. And shale plays weren't the money magnets they once were for E&Ps. Transaction values for gas resources, in Pennsylvania and Ohio in particular, withered.

Activity was up in the midstream arena, but value still fell for the year.

At the other end of the bargaining table, sellers still expected premium pricing in a modest market. Deals crawled, with transactions stretching from a typical five-to-seven month span to 12 months or longer.

“Deals just weren't getting done,” Marko said.

North America wasn't the only place where A&D slowed. Globally, A&D transaction values declined by $86 billion to $337 billion in 2013—about a fifth less than in 2012, said Andy Brogan in EY's Global Oil and Gas Transaction Review.

The final three months of 2013 saw 51 oil and gas deals with values greater than $50 million accounting for $41.7 billion, a 29% drop compared to the fourth quarter of 2012, according to PwC.

As in years past, lots of capital was left on the table. Private-equity was the most liquid in history, with more than $60 billion of E&P-focused capital, said Craig Lande, managing director, RBC Richardson Barr.

Private-equity and small-to-mid-cap public companies were the top A&D buyers in 2013, Lande said. Private-equity accounted for about $9 billion in acquisitions that targeted conventional and unconventional assets.

Small- to mid-cap companies took advantage of large-caps' generally cautious stance on acquisitions.They aggressively pursued “transformational acquisitions” in resource plays, Lande said. Small-to-mid-cap A&D tallied $9.5 billion in 2013.

Large-caps remained on the sidelines for the most part, focusing mainly on “core-of-core” acreage because of already large inventories, Lande said. Companies like Apache Corp. weren't interested in 50,000-acre packages when they “already have a terrific inventory. They're very cautious from that standpoint,” he said.

With solid inventory, “they need to focus on that first.To pay an acquisition cost for additional acreage just doesn't make sense unless it's core, de-risked acreage. Then they will pay a premium for it.”

Marko said the industry was also skittish about oil prices, U.S. politics and the strength of the economic recovery. And, he was surprised by the dearth of billion-dollar deals.In 2012, 98 oil and gas transactions exceeded $1 billion in value, compared with 70 in 2013.

Look for a turnaround in 2014, he said.“What was missing was appetite, because people kind of had fulfilled their appetite. All of that is different in 2014. I think there's a lot more optimism. I think it's going to lead to a lot more busy 2014.” Lande agrees.RBC expects a more robust onshore A&D scene with $50 to $60 billion in onshore transaction value. Deals will flow as companies pursue high-quality, coveted resource play assets. Conventional assets will continue to be shed by public companies to a deep bench of master limited partnership (MLP) and private-equity buyers.

Year of the Permian

For the past few years, the shales hosted North America's A&D “gold rush,” with transactions making up to 50% of deals globally at their peak in 2011, said Neil Beveridge, senior analyst for Bernstein Research, in a mid-January report.

“Since 2012, we have seen a collapse in [North American] transactions from over $80 billion at the peak to just over $20 billion last year,” Beveridge said.“While some of the A&D activity was driven by foreign companies taking positions in North American shale plays, this has effectively ended.”

Beveridge said A&D will resurface in North America's shales, as plays become mature and opportunities for expansion wane.

North America remains the nucleus of unconventional deal activity. U.S. A&D for unconventional resources accounted for about 35% of all upstream deals and about 33% of all reported upstream deal values globally in 2013, Brogan said.

Both the number of deals and the reported value were down for E&P companies compared to 2012.

U.S. onshore A&D deals for shale were still dominant, especially in the “Big Three” oil resource plays: the Permian Basin, the Bakken and the Eagle Ford.They accounted for about 41% of total U.S. onshore asset sales of roughly $41 billion, Lande said. The Permian represented $5.1 billion (with 21% of oil resource supply); the Bakken, $3 billion (12% of oil resource); and the Eagle Ford, $8.4 billion (34% of oil resource).

In the Eagle Ford, a single deal—Devon Energy's purchase of GeoSouthern Energy's oil assets for $6 billion—made up the bulk of the shale's transactional value.The transaction, pending as of January, was the largest U.S. deal for 2013 and the largest for the Eagle Ford shale to date, according to Jefferies & Co.

But even with Devon's huge buy, Lande said 2013 was the “year of the Permian.” Valuations there surged, wells performed promisingly and operators achieved multi-pay success. Companies such as Pioneer, Laredo, Diamondback, Energen and other independents continued to help delineate the Midland Basin, especially in the second half of 2013.Multiple announcements were made of highly prolific horizontal wells across several pay zones.

The highest-quality packages in the most coveted basins traded at record valuations. Noncore assets, on the other hand, often didn't trade at all.

Strong oil prices almost all year long made the Permian red-hot, said Phil DeLozier, senior vice president of business development for EnerVest Ltd.

The year started out slowing for EnerVest, a perennial deal maker. DeLozier said that after 2012's frenetic finish in the fourth quarter, so many significant investments had been made that larger public companies “were kept busy processing and evaluating the acreage that they had acquired.”

Most of EnerVest's deals came to fruition in the last five months of the year, said John B. Walker, chief executive officer.The company acquired about $1.5 billion worth of assets in the Midcontinent, Uinta Basin, Barnett shale and San Juan Basin.

The company also sold $1.4 billion during the same time frame, mainly via a $950 million sale of its Permian holdings to QEP Resources in December. EnerVest sold the asset despite it being perhaps the best property in its stable, Walker said. Economics favored making the deal after EnerVest bid on Permian properties and lost to others by 50% or more. DeLozier said it was obvious that “the basin was in a frenzy. People were willing to pay some very high prices.”

The opposite was true for shale-gas acquisitions. Gassy plays already have been tough to market because of depressed regional gas pricing.In 2013, A&D activity in the Marcellus and Utica shales tallied $4.7 billion, a fifth of the $23 billion spent in 2011.

The fate of those gas plays may change greatly in 2014.“In the fourth quarter of 2013, shale deal activity increased along with broader conventional industry activity, especially in the Marcellus shale,” said John Brady, a Houston-based partner with PwC's energy practice.

Walker said EnerVest will run counter to the market and target long-lived dry-gas reserves or gas reserves with some liquids.

“You have to make bets, long-term bets,” he said.“They're strategic bets.If public companies are buying oil and bidding up the price of oil properties, then we are looking primarily at things they don't want that they want to sell to get their oil property.”

Marko, too, said he holds some optimism for gas in 2014.

“I think you'll see this year be potentially the year of a lot more gas transactions where the gas market takes off, and that's because there's a lot of gassy sellers needing to sell, like Encana,” Marko said.“I think the private-equity guys particularly could be interested in gassy opportunities.”

Demand may also increase as liquefied natural gas (LNG) suppliers become more serious about securing physical supply, gas vehicles become more commonplace and power generation's and manufacturing's use of methane increases.Each could add, plus or minus, 5 billion cubic feet per day (Bcf/d) to the demand side.

“It's not without challenges,” Marko adds.“We had record draws [in January] because of the weather and the gas price didn't respond very much.”

The lookout

In 2013, North American A&D made up 53% of global deal volume. However, the region saw a relative decline in importance, with upstream deal activity in the U.S. dropping as shale-gas activity declined, Brogan said.

A rebound is possible in several sectors, depending on how government and regulatory policies play out and how public and stockholder perception is shaped.

And, foreign investment is needed to come back to town after being largely funneled elsewhere in 2013.The U.S. drew billion-dollar deals from Sinochem and Sinopec International Petroleum, but huge deals went elsewhere. China's CNPC agreed to a $60-billion, longterm supply deal with Rosneft; PetroChina bought Petrobras' Peruvian interests for $2.6 billion; and national oil companies invested in New Zealand and Africa.

“Beginning in August or September 2012, foreign investors for the most part pulled out of making their investments in the shale plays in the U.S.,” Walker said.“I'm not saying there weren't any in 2013, but they diminished significantly. I think part of the reason for that was they spent an enormous amount of money. A lot of them just wanted to evaluate the results they had gotten.”

That's beginning to change in 2014.

“We are starting to see inquiries again from some of the Asian investors and some other foreign investors,” Walker said. As of January, “we've been in a pause now of probably a year and four months of foreign investors playing a major role in our market.”

Lande said a door is opening to conventional asset sales in 2014.Unconventional shale rules the day in public perception and shareholders want to see horizontal drilling, big laterals and fat EURs, Lande said. Conventional assets and ho-hum vertical drilling are clearly not the focus for public companies. “Vertical drilling just doesn't have the sex appeal anymore, and it's not where the money is being funneled,” he said.

Companies could tap capital markets for development of conventional assets but are more likely to sell. “They're going to end up selling those assets to redeploy that capital to whatever unconventional plays they're working on,” Lande said. “The cheapest form of capital to start with is raising cash through asset sales, and then putting money to work where shareholders want to see it.”

Furthermore, public companies are being rewarded by investors for being more basin-focused in two or three basins rather than eight or nine.In 2014, that should continue the “shrink-to-grow” theme seen in 2013 and help spur further asset sales, Lande said.

The midstream sector should also gain traction this year.

As E&P investment dollars were pumped into North America, the midstream sector struggled to keep up with demands to move production from new producing regions or to increase capacity elsewhere, said John England, Deloitte vice chairman and U.S. oil and gas leader.

As we move into 2014, investments in the energy renaissance will continue to shift from the upstream sector to midstream infrastructure, refinery operations and petrochemical facilities,” England said in a posting on Deloitte's website.

Brogan agrees, saying that a consistent theme for U.S. transaction activity in 2013 was investment in the midstream subsector. Midstream deal values were down about 15% from 2012, possibly because companies decided to launch initial public offerings rather than sell assets. Still, five of the 10 largest transactions in the U.S. were midstream, he said.

On the global stage, A&D activity in 2014 will be driven by capital discipline, with international oil companies' mega-projects continuing to compel portfolio optimization, Brogan said.“For some, this may mean aggressive divestment campaigns; for others, more innovative financial structuring solutions.”

National oil companies will continue to partner together, and these relationships will help to shape the industry. And the global energy industry will have to continue to come to terms with unconventionals, which have broken the previous decade's consensus on oil-price trajectory and have the potential to restructure the global LNG market.

“Its impact is everywhere,” Brogan said.“As always with new technologies, each wave of innovation will bring with it winners, losers and A&D activity.”

For more M&A deals and analysis, including properties on the market, see A-Dcenter.com.