Even with an estimated pickup in A&D activity to the tune of $10 billion in transactions in the fourth quarter, a languid A&D market in 2013 is likely to see transactions totaling only a little more than $30 billion, or roughly half the level in 2012, attendees heard at Hart Energy's A&D Strategies and Opportunities conference in Dallas last month.

Scott Richardson, co-founding principal of RBC Richardson Barr, Houston, noted that transactions in 2010-2012 were in the $55- to $60-billion range annually, with 2012 getting a bump up to almost $60 billion, driven in part by heavier-than-normal tax-related selling. Typically, the fourth quarter accounts for an outsized percentage of deal flow for the year, although the outlook was uncertain for this year, he noted.

“If we have a similar quarter this year—which I don't think we will—we're probably going to close the year anywhere between $30- and $35 billion, which is a pretty dramatic decrease from years past,” said Richardson.

The $10-billion estimate by RBC Richardson Barr for this year's fourth quarter compares to $7.6 billion and $8.4 billion in transaction in the first two quarters of 2013 and $4.9 billion in the third quarter through August. The average quarterly rate of transactions last year was just under $15 billion, with $18.9 billion in the fourth quarter.

Richardson attributed the slower transaction pace in 2013 to less selling by private companies—in contrast to last year's selling ahead of possible changes in the capital gains tax—as well as fewer joint ventures. Joint-venture activity had been “pretty frothy for two or three years,” with $7- to $10 billion a year in transactions. But this has largely dried up, with Chesapeake Energy, for example, selling interests in only $1- to $3 billion a year of properties, down from a previous pace of $5- to $10 billion.

“And the biggest issue is on the undeveloped acreage deals. We're seeing a lot more failed deals,” said Richardson. “From 2004-2010, it really was much easier to sell undeveloped deals. You had a lot of serial basin buyers, whether it be XTO, Chesapeake or whoever. Now you really don't have that same buyer. And the result is probably a lot more transactions that are not closing that are undeveloped.”

Richardson said transactions today are really “segmented” into two markets: a “core of the core” market for properties in coveted resource plays, where “valuations today have never been better;” and a second market for lower quality properties—ones “with a little hair on them”—that are selling for modest metrics or don't sell at all.

In terms of current themes, the Permian is the basin with the most “sizzle,” said Richardson. “We've never heard so much buzz about the Permian as we are now. The private market loves the Permian, and the public market loves the Permian.”

With the joint-venture market “more challenged,” and capital intensity higher in resource plays, another theme identified by Richardson is public companies' strategy to “shrink to grow.” By selling noncore, often unconventional properties, they can then re-deploy assets in their top resource plays. “I think that's a trend you will continue to see. I think that's a big variable that's going to cause 2014 to be a little more active than 2013.”

As for buyers of onshore properties, Richardson said private-equity sponsors have been the most active buyers, with $9.2 billion in transactions, a lot of it in the natural gas sector, and mostly involving conventional properties.

“We'll probably see this trend continue,” he said, noting that typical deals involved 30% to 50% proved developed producing properties.

Smaller capitalization public companies, taking advantage of a “friendly high-yield market,” have been more aggressive than large-cap companies, accounting for $8 billion in purchases versus $5.6 billion for the large caps. “The large caps are not the big buyers they used to be,” said Richardson. “They're being very, very selective. They're buying core of core.”

The majors, with $5.1 billion in transactions, have been “the most disappointing sector, from my perspective,” said Richardson, who noted they were “sitting on $50- to $60 billion of cash. But we haven't seen the majors in the corporate M&A market or in the A&D market. I think they are challenged to make North American resource plays work with their cost structure.”

For details on assets on the market, see A-DCenter.com.