HOUSTON—Sooner or later, the Permian Basin’s breakneck A&D pace seems bound to falter. Oil prices continue to idle while 150 acres of Texas scrub brush can command roughly the same price as a posh Manhattan townhouse.

According to John England, vice chairman and U.S. oil and gas leader at Deloitte LLP with Permian prices bidding up, some companies are looking elsewhere—even to the Vaca Muetra in Argentina as a potential play outside of the U.S.

“I think we’ll see people maybe spreading their bets a little bit more going forward,” England said at a Sept. 21 press briefing at the 2016 Deloitte Oil & Gas Conference.

For other sectors of the oil and gas industry, some form of consolidation may be coming. Midstream companies may have a better chance closing a deal than wading through protestors and regulations. Oilfield service companies, at the same time, may look to align their interest with fellow companies.

“This recovery in many ways mimics the pattern of the recovery from the Great Recession,” England said. “If last year was the year of hard decisions, 2017 will be the slow road back.”

But companies recognize that even as prices recover, the industry likely won’t fully recover until 2018 or beyond.

Most executives believe that $60 per barrel is an important threshold for a revival in U.S. E&P activity, according to Deloitte’s 2016 oil and gas industry survey released Sept. 21.

Pay For Play

E&Ps are expressing a cautious optimism, England said.

It helps that debt markets, which had been effectively closed to the industry, are beginning to loosen, said Ray Ballotta, M&A transaction services partner at Deloitte.

Equity markets have also continued to be bullish on the sector, Ballotta said.

Independent, onshore E&P companies have tapped equity markets to the tune of $19 billion during the past year despite the depressed price of oil.

“While the proceeds of these offerings have been used to reduce debt and strengthen balance sheets, healthier companies have and will continue to utilize proceeds to fund acquisitions in core positions,” he said.

Most E&P companies offering shares have publically indicated that proceeds will be used to acquire acreage and the public markets have accepted this strategy.

“But there’s one major catch,” Ballotta said.

Investors are focused only on the most viable and cost effective locations—largely the Permian and the Stack and Scoop fields of Oklahoma—where producers can turn a profit. The snag is that prices are rising exponentially.

In the second quarter, 13 companies announced transactions in the Permian with an average price of $17,000 per acre.

By the third quarter, the implied deal value per acre ranged between $20,000 and $40,000 per acre.

“It's a double-edged sword for investors on the prowl,” Ballotta said. Deals will be increasingly more difficult to find if valuations stay high without consensus of a rise in crude oil prices.

Public E&Ps aren’t the only ones bidding either. Private equity, with billions of dollars in available capital, has funded management teams with equity commitments, in some cases as large as $500 million to $1 billion, Ballotta said.

“Again, many of these management teams are focused on acquiring core positions in the Permian,” he said.

The Natural

Domestic natural gas prices remain in the doldrums with little to suggest a change, according to Deloitte’s survey.

More than half of Deloitte’s survey respondents expect Henry Hub prices to remain unchanged at the close of 2016. For the period of 2017 through 2020, a majority think that prices would be range-bound between $1 and $2.50 to $3.50 per million British thermal unit.

However, the Haynesville may be one area where increased capital for acquisitions will flow.

“The reason for that is the lower price differential relative to market and relative to Henry Hub given their proximity to market,” Ballotta said. “And they’re also a potential source for LNG.”

While MLPs have largely gone dormant in the current market, many survey respondents expect a moderate level of midstream consolidation in 2016 and 2017.

“Consolidation is increasingly seen as a strategy for growth where building new pipe has become harder to execute with opposition and regulations that have delayed getting projects getting off the ground,” Ballotta said.

Notably, the Dakota Access Pipeline received all required approvals to add 1,172 miles of line before protestors briefly won an injunction to stop construction. On Sept. 9, after a U.S. district judge ruled that the Dakota Access project was in compliance with U.S. rules and regulations the Department of Justice, Department of the Army and Department of Interior put a halt to the pipeline anyway.

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The oil price downturn has hit oilfield service companies particularly hard.

“In general, M&A activity in the oilfield services sector has been muted but consolidation in the middle market could be on the horizon, particularly if financing markets cooperate,” Balotta said.

However, revenue generation will not drive transactions.

“Cost synergies have become a main focus for transactions while revenue synergies no longer motivate deals,” Ballotta said.

Darren Barbee can be reached at dbarbee@hartenergy.com.