HOUSTON—As the oil and gas industry transitions from the depression to the acceptance phase of its grief-stricken downturn, a group of consultants says 2016 could hold golden opportunities for exploration and M&A.

That is, if balance sheets are strong and companies are willing to take a long-term risk, said John England, vice chairman and U.S. oil and gas leader for Deloitte LLP, said Jan. 25 at a media event.

Companies are adjusting their strategies, seeking further cost savings, cutting exploration budgets and halting projects now considered uneconomic due to lower commodity prices that have crushed profit potential amid today’s slow-growing global energy demand.

Despite many companies being in survival mode, England said the chances for asset acquisitions are good—as costs for rigs and related services fall. “It’s a great time to go long on exploration and build a portfolio for the future,” England added.

Companies will face risk, but England said 2016 is “the year of hard decisions” that will reshape the industry.

In 2015, many companies were still in denial, not willing to take such a risk.

Waning M&A Activity

Deloitte’s year-end report on oil and gas M&A activity showed the lowest upstream deal count and value since 2012.

Buyers faced fears of potentially overpaying for acreage should the downturn deepen. Sellers were unwilling to let go of assets at large discounts, the consultants said.

With access to financing, distressed companies—for the most part—were able to hang onto their assets and avoid being acquired by others.

In all, the deal count, which included the upstream, oilfield services, midstream and downstream sectors dropped 53% from 709 in 2014 to 379 in 2015. The deal value also dropped—by 20% compared to 2014.

Total Deal Count (all sectors)

Deal-making in the oilfield services sector plummeted 70% to 36 last year from 120 in 2014. Transaction value fell by 64% to less than $25 billion.

Only the midstream sector saw more M&A activity, closing only one more deal than in 2014.

“Going forward into 2016, the M&A market could continue to languish, unless oil prices and even natural gas prices recover to a more economic level,” Deloitte said in the report.

Watching Production

Oil prices remain stuck as high U.S. and OPEC production oversupply the planet.

“Until rebalancing occurs with demand growth eroding the inventory overhang, prices will likely remain depressed,” Deloitte said.

In addition to the pace of Asian energy demand, geopolitics and tension among OPEC members seeking to gain or retain market share, England said U.S. production levels will be closely watched.

Shale oil production is forecast to fall by 116,000 barrels per day (bbl/d) to 4.83 MMbbl/d in February, the U.S. Energy Information Administration said Jan. 11. The EIA tracks oil production from the seven shale regions.

Falling production in the U.S. would send a positive signal from a price perspective, England said.

“Many people were thinking that production rates would immediately fall as prices were coming off,” said Robin Bertram, oil and gas resource evaluation and advisory leader for Deloitte. But it’s important to remember that after a company spends capital on producing wells, focus turns to the marginal costs to produce the next barrel, he said.

Cuts, Savings, Efficiency

As companies prepare their year-end reserves reports, Bertram expects to see some negative revisions to booked reserves, taking into account undeveloped reserves.

He also expects to see companies place more emphasis on containing costs, devising more efficient operating strategies and taking advantage of cost savings resulting from increased competition for their business.

Drilling companies are “going to look to lower their day rates for new wells,” Bertram said. “Companies are in fact taking advantage of that, but that is still not sufficient to keep the drilling activity as high as what we have seen in prior years.”

Bertram said he has noticed companies reviewing their portfolios, high-grading activities and targeting their best wells. Having already found the big costs savings, companies are now looking for the little things—anything that would, for example, add a 1% cost savings or increase production by 1%, he said.

But in the back office, companies are weighing deal opportunities—whether to grow or consolidate operations or find a new play, Bertram added. However, commodity price uncertainty and the wide gap between buyers and sellers need to close for M&A activity to ramp up.

Of the upstream deals that moved forward in 2015, most were acquisitions of producing fields, the asset category with low development risk, Deloitte said.

Velda Addison can be reached at vaddison@hartenergy.com.