The sky is no longer falling in the oil and gas M&A market, KPMG energy finance analysts say, but the corporate appetite for deals in the sector is still expected to drop by about 10% in 2018 compared to 2017.

The “appetite” is measured by forward P/E ratios, the analysts said in the company’s annual “M&A Predictor” report that forecasts deal activity in four major sectors—consumer markets, financial services, industrial markets, and technology, media and telecommunications—as well as utilities and oil and gas.

“We anticipate a mixed but promising year for energy sector M&A transactions in 2018 as the market continues to stabilize and companies increasingly position themselves for greater earnings growth,” wrote Henry Berling, managing director and head of U.S. energy investment banking at KPMG, and Manuel Santillana, global energy and natural resources deal advisory lead partner for the firm in Spain.

KPMG’s data points to an 11% increase in corporate capacity to fund oil and gas M&A growth. The utility sector increase is only 2%.

“The gap between the bid and the ask in the oil and gas markets could fully close in 2018, prompting the beginning of an increase in deal activity,” Berling said.

The analysts cite an 11% hike in total energy deal value during first-quarter 2018 to $184 billion. The increase came as deal volume slowed by 18%, meaning that the average deal in the quarter was valued at $380 million, by far the highest in 10 years.

Also promising, wrote Santillana, is the 2018 renewable energy M&A market.

“We expect activity to continue moving toward clean energy businesses over the next year or two—the trend toward cleaner generation sources is happening and will continue,” he said. “Specifically, Southeast Asia, China and India will continue their healthy growth into renewable energies and transactions.”

The latest run-up in oil prices could usher in a new phase of upstream M&A activity, said Simon Flowers, Wood Mackenzie’s energy chairman and chief analyst, in a recent post. M&A slumped following the oil price crash in 2014 and buyers were keen on finding low-priced assets, he said.

“This kind of environment always stifles transaction activity,” Flowers said. “The market won’t get going until a settled consensus emerges on future prices, allowing a ‘fair’ valuation of assets that works for both sides.”

However, it will take time for there to be sufficient price stability to allow a consensus to take hold again, he said.

Overall, Flowers sees two factors influencing the market:

  • Geopolitical events are affecting the oil market as much as fundamentals, which he said tends to diminish the consensus view on future prices; and
  • Companies continue to prioritize returns and cash generation over growth in their pursuit of M&As, which he sees as a mentality that could be changed by a strong tightening of market fundamentals.

Berling believes that shift is already happening.

“Energy businesses are beginning to drive for earnings growth and there is no shortage of available funding in oil and gas, particularly the services side,” he said. “Companies are willing to re-enter the market, including a big push internationally to invest in North America.”

Joseph Markman can be reached at jmarkman@hartenergy.com and @JHMarkman.