U.S. downstream sector M&A transactions plummeted year-over-year in 2013, but analysts believe higher global demand for refined products and new pipeline operations could revive transaction activity this year. Overall deal values dropped 61% between 2012 and 2013, while deal volumes fell 38% year-over-year, according to a report by EY. Low refinery utilization rates and tight crack spreads depressed M&A activity in the downstream sector last year, EY said. Potential federal regulations that affect refiners could be a drag on activity this year, in addition to commodity price fluctuations driven by quantitative easing. EY also noted, however, that global economic recovery could spur higher demand for products refined in the U.S., potentially attracting investor interest in Gulf Coast assets. Robust demand could come from Europe, where the refining sector is in a downward spiral. Additionally, the report's authors believe the recent commencement of operations in the southern leg of TransCanada's Keystone XL pipeline could drive deals in the downstream sector.
The U.S. midstream and upstream sectors did not fare much better than downstream in 2013, with overall deal values down 15% and 27%, respectively. The level of investment activity in the midstream business was a prevailing theme in 2013, however, as five of the 10 largest transactions took place in that sector. The rise in the formation of master limited partnerships, which offer certain tax advantages over IPOs, may have contributed to the decrease in deal values in the midstream sector last year.
The decrease in oil and gas transactions was a global trend, as worldwide deal values fell 21% year-over-year — not as steep a drop as the 37% experienced in the U.S. EY maintained nonetheless that oil and gas has remained one of the most active and resilient industries for M&As.