[Editor's note: A version of this story appears in the December 2018 edition of Oil and Gas Investor. Subscribe to the magazine here.]

Way to hang in there, 2018. E&Ps saw a rebound in deals and rig activity, with most operators keeping itchy trigger fingers off their capex guns, at least for now.

Producers have mostly gotten religion on financial discipline, even as oil prices have rebounded 35% in the first three quarters—to an average $66.89 compared with 2017’s $49.39.

But just when you want to scream, “Who are these people?” E&Ps kept the voltage cranked up in 2018—unleashing 13 monster deals worth $46 billion.

Experts, analysts and industry watchers see risks and opportunities in the shale world, with fiscal discipline again the watchwords of oil and gas producers.

As 2019 and the Year of the Pig dawns, uncertainty reigns. Luckily, predictions abound, particularly around capex and M&A.

For this outlook, Oil and Gas Investor relied on traditional sources as well as some slightly more archaic forecast methods. In a year in which Raymond James changed its oil price forecast three times, who’s to say one method is more effective than another?

M&A and capex in the Year of the Pig—The pig, a symbol of wealth (and bacon) in the Chinese zodiac, is also the hallmark of careful spending.

For M&A, 2018 was the Year of Consolidation. Among deals of at least $1 billion, the third quarter rang up a $100-billion tab—more than all of 2017 combined, PwC said in its third-quarter review.

That continued through the fourth quarter: Denbury Resources Inc. (NYSE: DNR) said it would acquire Penn Virginia Corp. (NASDAQ: PVAC) for $1.7 billion. Chesapeake Energy Corp. (NYSE: CHK) went bigger, announcing a merger with WildHorse Resource Development Corp. (NYSE: WRD) for about $4 billion. Then Encana Corp. (NYSE: ECA) threw down $7.7 billion (including $2.2 billion in debt) for Newfield Exploration Co. (NYSE: NFX).

Still, 2019 could be a year lived even higher on the hog.

Among oil and gas CEOs, 83% are anticipating a moderate to Hungry-Man appetite for M&A activity during the next three years, “largely driven by the need to reduce costs through synergies/economies of scale, a speedy transformation of business models, increased market share, and low-interest rate,” KPMG’s 2018 U.S. Energy Outlook Survey found.

The deal landscape of 2018—Year of the Dog—was not without its fleas, with many companies paying twice for deals: once to the seller and again in nosediving market valuations.

Typical Permian extravagances included $18.7 billion in two deals: Concho Resources Inc.’s (NYSE: CXO) assimilation of RSP Permian Inc. and Diamondback Energy Inc.’s (NASDAQ: FANG) rollup of Energen Corp.

But deals in the Eagle Ford, Utica and Fayetteville have also generated plenty of noise.

Such deals aren’t unreasonable “given where we sit with pipelines and takeaway capacity out of the Permian,” said Steve Wood, managing director at Moody’s Investors Service. “In part that’s because companies have redirected capital away from the Permian and to the Eagle Ford, Oklahoma Scoop and Stack and the Bakken.”

Regina Mayor, KPMG’s global and U.S. energy sector leader, said M&A is an easier way for companies to get the growth that investors want, particularly from a multiples perspective.

For 2019, the pressure is on to grow production volumes and reserves growth while also trying to “demonstrate the devil out of capital discipline.”

Deals offer a way to add volumes, reserves and cash.

Nevertheless, Mayor has still been “surprised by some of the megadeals that have been done,” she said.

“I hadn’t anticipated those. But with some of the recent announcements and some of the megadeals that I would expect, there’s probably more of those in the offing as well and some of the smaller-scale ones,” she said.

Consolidation is particularly helpful for streamlining overcapacity and fragmentation.

“If you’re just looking at the rig market as an example, we have many more drilling rigs than the world needs,” she said.

Still, as Mayor likes to say, if she had a working crystal ball she wouldn’t be giving predictions to reporters during an interview. She’d be on an island somewhere.

Comets and assorted portents of doom—Sleep with one eye open.

Threats remain that could influence M&A and capex including disruptive technology, environmental and climate change risks and a rise in economic nationalism.

Oil and gas CEOs’ worries are fueled by uncertainty over unresolved trade wars, tariffs and changes to NAFTA, said Mayor.

CEOs see a “return to territorialism” as a top threat to growth, the KPMG survey found.

Those worries are more keenly felt among oil and gas CEOs, 18% of whom cited the topic as a top threat compared with 16% of all survey respondents.

“We’ve already seen some effects due to the trade war with China, but there’s also going to be a loss of oil from Iran coming soon,” she said of sanctions that were put in place Nov. 5. “That is the exact conundrum I see when I talk to clients. What is the latest impact of the escalating trade tension between the U.S. and China? What does the new NAFTA ultimately mean for us?”

In August, China—the largest market for U.S. oil exports—suddenly stopped buying crude. The abrupt halt came after seven months in which China bought an average $731 million of oil per month, according to recent data available from the U.S. Census Bureau.

Moody’s Investors Service also spotlighted the industry challenge to pay $240 billion in debt, which matures by 2023. E&Ps are on the hook for the largest share—$93 billion.

Companies such as ConocoPhillips Co. (NYSE: COP) and Whiting Petroleum Corp. (NYSE: WLL) have paid down significant amounts of debt while Anadarko Petroleum Corp. (NYSE: APC) has divested and has plans to whittle down its IOUs.

“Our view is there’s still too much debt in the industry, broadly speaking,” said Wood. E&Ps will likely pay through free cash flow or proceeds from asset sales, but it’s unlikely public equity markets will help out.

Basin Precognition: Nothing is guaranteed. Baba Vanga, the blind Bulgarian mystic (and potential Led Zeppelin album title) predicted a new form of energy would be discovered on Venus in 2018. She never said earthlings would discover it.

Bakken—Scorpio: Congratulations on your reincarnation. Your ambitions run deep, just maybe not as deep as your drillable inventory.

M&A compatibility: Bakken operators have enjoyed a strong hand to play in capital markets, which should continue in 2019.

The Bakken’s inherent advantages included pipeline capacity and plentiful free cash from already healthy production bases.

Approving investors didn’t flinch at Whiting Petroleum’s pick-up of acreage from Oasis Petroleum Inc. (NYSE: OAS) for $130 million.

Still, Dane Gregoris, senior vice president at RS Energy Group (RSEG), does not expect large-scale M&A.

“I don’t think that the core acreage is going to change a lot,” Gregoris said. “A lot of operators are pretty happy in their core positions today. Generally, they’re looking to add core inventory or add inventory, period. That’s the one tough part about the Bakken is that it’s a fairly developed play.”

At $70 per barrel of oil, the Bakken may have about eight to 10 years of drilling locations remaining, he said.

M&A activity will likely follow historical fringe areas where more intensive completion methods have improved economics and created more potential inventory.

Capex hunch: “The Bakken has been fairly active,” said Wood. “There’s talk about trying to increase the capacity of the Dakota Access to create more takeaway capacity for the Bakken.”

Marcellus/Utica—Virgo. Virgos are known for their cool, calm demeanor, but hopefully that chill is a sign of a cold winter.

M&A compatibility: The Marcellus and Utica are a place of give and take. Southwestern Energy Co. (NYSE: SWN) sees the area as desirable enough to part with its producing assets in the Fayetteville. Chesapeake Energy is heading out.

“Southwestern was the very dominant player in the Fayetteville, but they clearly had made a strategic shift up into the Marcellus,” Wood said.

Chesapeake, by contrast, is in the process of selling its Utica position for $2 billion.

Generally, companies are still vying for blockier positions, which could spur some deals. “If they can drill a 2-mile lateral instead of 1-mile laterals, the returns go up dramatically,” he said. “So there’s a huge incentive for consolidation. Certainly, it makes sense that that’ll happen [although] the Marcellus and Utica tend to be dominated by some larger companies.”

Still, while technology has made well results competitive, “there hasn’t been the large strategic interest in the play because large publics like Anadarko, EOG [Resources Inc.] and Apache [Corp.] have been biased to oil plays,” Gregoris said. “They’ve been focused on liquids, and they haven’t been as excited about the gas markets.”

Capex premonition: Antero Resources Corp. (NYSE: AR) and Range Resources Corp. (NYSE: RRC) continue to develop the plays, Wood said.

Gregoris said RSEG projects massive Lower 48 production growth as Appalachian pipeline buildout further opens up the basin.

Storage levels are also at their lowest levels since the early 2000s. Price will be the determinant. “If we see soft gas prices where the strip is, $2.60 to $2.70, I could see rigs kind of being peeled off a little bit, to be honest,” Gregoris said. “If we have a really cold winter, and gas prices spike, maybe there’s a little more aggressiveness” and rig counts will stay flat or increase slightly.

Barnett Shale—Sagittarius: Open-minded Barnett operators should seek out Leos (or anyone else in the area) for deals. Your lottery numbers are 22, 6, 2, 17 and 01.

M&A compatibility: ConocoPhillips and Devon Energy Corp. (NYSE: DVN) both made major divestitures in the Barnett in 2018, selling legacy areas of the shale revolution’s first play. Devon parted with production of about 200 million cubic feet equivalent per day (MMcfe/d) of natural gas for $535 million. ConocoPhillips sold its assets for $230 million. Devon still holds Denton, Wise and Tarrant counties, Texas, assets with average production of 680 MMcfe/d, which along with Canadian assets underpin 40% of the company’s output.

Bottom line, more sales may be coming.

Ominous omens: The Fort Worth Basin fluctuates between one and two rigs, and through the first nine months of 2018, the Texas Railroad Commission reported approving 80 drilling permits—down 98% from the shale’s 2008 heyday.

Permian Basin—Tarot card, The Hermit. Traditionally, The Hermit card suggests a period of introspection. Whatever challenges come your way, you’ll cross that pipeline when it’s built.

M&A compatibility: While deals are on tap in the Permian, the tap is a problem, with oil movement out of the basin in a traffic jam.

Pipeline constraints in the Permian have led to crippling differentials, which don’t just hurt E&Ps revenues but also choke off access to skittish public markets.

Nevertheless, acreage in the Permian still commands the highest premiums.

As Mayor noted, “Once the IOCs are in the basin, it’s pretty well-played.”

As infrastructure is built out and more lines come online at the end of 2019, equity markets should begin to de-risk operators that they currently undervalue, Gregoris said. As that happens, and equity begins to rise, operators are likely to have the ability to do more M&A.

Equity advantages open up deal possibilities.

“That’s exactly what you saw with Diamondback [Energy Inc.] and Energen [Corp.],” he said. Diamondback “always had terrific well performance, always beat their numbers on a quarterly basis and traded at a premium to Energen because of that.” Similarly, the premium on Concho’s stock “made the RSP deal look accretive.”

Broadly, however, stocks haven’t done as well this year given the glut in terms of realized pricing at Midland

The most interesting Permian deal from RSEG’s perspective was the New Mexico tracts acquired by Matador Resources Co. (NYSE: MTDR) during September’s Bureau of Land Management auction. Matador spent up to $95,000 per acre in some areas. Overall, Matador purchased 8,400 net acres for $387 million.

“It initially seems like a crazy number,” Gregoris said. But based on the amount of sections per well that are drillable, the math works to a profitable deal.

“That’s sort of a leading indicator in our view,” he added. “When markets are a little more receptive, you’re going to see continued M&A as the good operators have access to capital. They will scoop up smaller operators at an accretive price.”

Active intuition: Notably, Permian rig count grew by about 20% before stabilizing in first-half 2018. Since June, rig activity has ticked up by 2% through September, averaging 481 rigs a week, according to data by Baker Hughes Inc. (NYSE: BHGE), a GE company.

Spending will likely stay flat for many Permian companies until pipelines begin to move product, Wood said.

“I think we’ll see as we get into the middle of next year and these pipelines begin to come back on, we’ll certainly see increased activity in the Permian,” he said, adding that rigs could go up as early as the second quarter in anticipation of more takeaway capacity.

For now, companies such as Occidental Petroleum Corp. (NYSE: OXY) are planning to hold capex at about $5 billion. EOG Resources Inc.’s (NYSE: EOG) 2019 capex budget is likely to be up year-over-year to $6 billion, an increase of roughly $400, according to Goldman Sachs analyst Brian Singer’s October report.

Eagle Ford—Aries. Possessing great energy, the Eagle Ford has been slugging it out for 90 million years, ever since the Cenomanian-Turonian extinction event. Just go with it.

M&A compatibility: The Eagle Ford is a tough call for Wood. Some consolidation could happen in the area, he said.

“The biggest surprise would be if there was a significant ramp-up in activity in the Eagle Ford,” he said. “We’ll see some steady activity. I think if there was a dramatic increase that would be surprising.”

What matters most to the fortunes of Eagle Ford operators is where they’re located, Gregoris said.

Eastern Eagle Ford companies may have an edge in gaining access to capital and the ability to execute deals. Magnolia Oil & Gas Corp. (NYSE: MGY) started off the year with a $2.7 billion deal to buy EnerVest Ltd.’s South Texas holdings, followed by a deal to buy Harvest Oil & Gas Corp. assets for $191 million. WildHorse (before Chesapeake’s deal) had also added acreage.

“The Eagle Ford has been a pretty attractive place to be,” Gregoris said, noting that adequate takeaway capacity has given it an edge over the Permian’s price realizations. “That ability, that access to markets has made the Eagle Ford a lot more interesting for operators.”

Magnolia is another new entrant that wants to do deals. “I would see the Eagle Ford broadly probably increasing from an M&A standpoint, the western side a bit less so,” he said.

Louisiana Austin Chalk/ Haynesville—The Animals: “There is a play near New Orleans/They call for raising funds/but the market isn’t ready for an IPO/and private equity knows it can’t get one.”

M&A compatibility: The Louisiana Austin Chalk has been a bit perplexing in its attractiveness to big operators, which have led leasing programs there. EOG and ConocoPhillips, among others, are taking the unusual step of preceding private-equity management teams to explore the area themselves.

ConocoPhillips said in April it had acquired 245,000 net acres in the center of the play for about $235 million and planned to drill exploration wells.

“We had a report on one well out there that didn’t do that great,” Gregoris said. “So there’s still a lot of questions about whether it will actually work. There’s definitely optimism from large-cap operators that one day they’ll be able to make it work.”

The Haynesville, given up for dead a few years ago, has returned thanks to technology and increasing demand, primarily for LNG exports and movement of natural gas to Mexico.

Deal flow would likely increase if private operators, such as Vine Oil & Gas LP or Covey Park Energy LLC, could launch an IPO. Both have filed registrations for public offerings without results. Both have also raised public debt.

“I think they’d like to IPO. There just hasn’t been the appetite from the public equity community to get one of these private Haynesville operators” public, he said. “The gas story is so marginal. Fifty cents is the difference between dropping rigs or adding rigs and, unfortunately, we don’t have a strong view on that.”

Nevertheless, deals are still getting done. LNG exporter Tellurian Inc. (NASDAQ: TELL) is actively hunting for upstream acquisitions to backstop its natural gas needs. Last year it purchased Louisiana acreage for $85 million.

Luck of the draw: The Haynesville rig count remained steady in 2018, averaging 50 rigs. Without sustained movement in gas prices, that’s unlikely to change.

Denver-Julesburg Basin—The Horseshoe—People with ropes around their necks don’t always hang.

The D-J Basin dodged a bullet with the failure of Colorado Proposition 112. Wood expects the area to remain active following a long sigh of relief from E&Ps.

Powder River Basin—Capricorn. People are taking notice of you, but can they find you on a map?

M&A compatibility: The big independent E&Ps are clearly interested in the Powder River Basin. Devon Energy plans to increase capex there. EOG is already ramping up and Anadarko Petroleum said in second-quarter 2018 it had leased another $100 million of acreage and owns 4.2 million mineral acres.

The Powder River has also seen about $1 billion in public M&A that will also likely continue, he said.

Mayor noted that more speculative private-equity money is prospecting in Wyoming (and Oklahoma) with the Permian’s valuations so high.

The basin can be a difficult read, however. Brad Handler, an analyst with Jefferies, said in a September report that a spike of 1,820 horizontal drilling permits in January dropped to 586 in August, apparently due to Wyoming’s oddball method of giving operational control to whoever files a drilling permit first.

Valuable intel: Large operators with significant land positions in the Powder River Basin have accelerated activity, Gregoris said. Chesapeake CEO Robert Lawler said in late October that the company plans to double oil production in the play in 2019.

“We would expect that [activity] to continue into 2019,” Gregoris said.

Stack/Scoop/Merge—Extrasensory Perception. Having doubts? It’s probably a little late for that.

M&A compatibility: The Oklahoma deal environment appeared headed for a rocky stretch, just before Encana said it would buy Newfield Exploration’s 360,000-net-acre Anadarko Basin position.

Encana stock promptly fell 12.5% following the Nov. 1 announcement despite providing covering fire with a 25% dividend increase for shareholders and a $1.5 billion stock buyback program.

“The all-equity deal and new-play entry will likely leave an overhang on the stock at least until operational synergies become noticeable,” Paul Sankey, managing director for Mizuho Securities USA LLC’s Americas Research, wrote in a November note.

Still, the Stack and Scoop have struggled with production results in 2017 and 2018, and that will lead to a softer deal market in 2019, Wood said.

“A lot of these companies are still looking to … optimize their wells designs, get a better understanding of the geology and figure out the optimal development,” Wood said. Still, it’s “relatively early days kind of in the grand scheme of things.”

Oklahoma seemed poised for M&A a year ago, Gregoris said, particularly with the “Alta Mesa SPAC [special purpose acquisition company] being able to issue paper and kind of roll up some of the worst-performing operators” and other, smaller private companies.

However, with Alta Mesa’s relative performance, “they’re probably not going to be able to do additional capital raises to do acquisitions in this sort of market environment.”

Consolidation may continue in the private domain, but public companies will find it difficult to make transactions “when operators don’t have a lot of access to capital on the fringes of the play,” Gregoris said

The Stack and Scoop also faces lofty expectations that began in 2016 with Devon Energy’s deal to buy Felix Energy LLC for $1.9-billion.

“I think maybe the misperception was that you were going to get high-quality well results throughout the basin.”

While some areas in the Scoop and Stack today remain “terrific from a returns standpoint,” their size isn’t comparable to the Permian’s vast area of goodies.

Wild card: Several public companies have recently concentrated on the Merge. Will it have what it takes?

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

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