PwC US energy lead explains optimism for shale in 2018

By Luke Geiver | January 30, 2018

The U.S. deals leader for Pricewaterhouse Coopers believes energy companies have an opportunity to go public or execute an acquisition this year. Joe Dunleavy, PWC’s deals leader said companies can now take advantage of oil prices in the high $50’s range, tax reform and increasing valuations for energy assets—including those related to shale.

According to Dunleavy, private equity firms looking to hold a liquidity event for a portfolio company or for a firm to perform an initial public offering, the industry is past the psychological $50/b barrier. “When prices got over $50/b back in 2016, we were helping a lot of companies get their information ready to go public,” he says. Although some companies were more cautious to take the same route this year when oil exceeded $50/b, Dunleavy said they are now looking to take advantage of an IPO window. Higher oil increases company and asset valuations which Dunleavy said has been the number one hurdle for getting deals done in the past three years.

Operators and investors have altered their philosophy on growth in 2017, a change that Dunleavy and his team at PwC said will impact deal valuations and volumes. As 2017 progressed, “companies began to look at deal making through a more strategic lens and focused on operations, return on capital and free cash flow, rather than simply chasing volume increases,” PwC said in its year-end insight report on oil and gas deals.

“Dealmakers entered 2017 with reawakened animal spirits and aggressiveness towards deals,” said Doug Meier, PwC’s greater Texas deals leader, “including liquidity events such as IPO’s. As the year progressed,” he also said, “these animal spirits were reined in by extreme focus: on core assets, on capital discipline and on expected returns.”

That discipline towards the end of 2017 was one reason deal making slowed at a time when it typically picks up as companies look to finish deals before year’s end, Dunleavey said. But, although Permian-related deals may have slowed, other shale plays could or will see an uptick after players in the Permian without scale have moved out.

“If you look to other basins, you see opportunities there and companies that are looking to grow and gain scale,” Dunleavy said of the Williston Basin and others. This year, E&P activity will once again lead deal making, with both midstream and services also remaining active.

“We are getting more calls from companies and private equity firms that are looking to make deals,” he said. “Private equity is a force to be reckoned with. They have capital to deploy.”

The presence of private equity cash could combine with tax reform to push activity higher in 2018, PwC believes. “We anticipate that the increased liquidity from the reduction in the corporate tax rate and the ability to access cash from previously non-patriated foreign earnings will fuel an increase in deal activity in 2018 by strategic buyers,” said James Prettyman, M&A tax partner for PwC.

“The resiliency of the shale sector is amazing. We are optimistic for what is ahead this year,” Dunleavy said, also adding that if companies do perform an IPO or other liquidity event, they need to be ready for the next 36-months post transaction. The time after such an event can be difficult for firms to manage or navigate which is why, he also said, that his firm is getting more calls recently as deal making appears to be heating up once again.

To view the full PwC year-end report and see other trends in energy deal making, click here: