OREANDA-NEWS. January 23, 2017. The booming Permian basin, spread over Texas and Mexico, will drive mergers and acquisitions (M&A) in the US oil and gas industry even though valuations are high. But other regions are not to be overlooked, said Mile Milisavljevic, a principal in PwC's US energy sector deals strategy business. From the sidelines of the Argus Americas Crude Summit in Houston, he tells Argus the factors driving M&A and shares his outlook on the US conventional oil industry. Edited highlights below:

Is the Permian going to drive US oil, gas M&A and why?

Milisavljevic: The Permian is already driving M&A as we are coming close to \\$10bn in deal value in last 10 days or so. A number of things are contributing to that. First, Permian, in terms of breakevens, is one of the best places we have in the US unconventional sector. So economics work. Second, companies have been drilling in the Permian for a long time and there is a lot of known things about the Permian and there is also infrastructure that has been built out. All of these things contribute to give a higher level of comfort with acquisitions rather than opening up a completely new province, where you haven't done anything and it is far away from everything. This is kind of the exact opposite of that.

Are Permian valuations getting too expensive?

Milisavljevic: Prices in the Permian are high. They are high compared to other things that are transacting. If you look at who is buying in the Permian, what you see is in part a trend toward position consolidation and position extensions, which are important for scale. After all, the unconventional industry is like manufacturing, so scale actually helps you drive the cost curve down. So if you already have a position and you are in a position to extend it, with all the knowledge that you have and the scale curve that you are going to get, you should be able to pay a little bit more. That sets up some companies for a higher willingness to pay more. Other companies, if you are brand new coming in to Permian, it is a lot harder math to digest. You don't have a position, you are subscale, it is harder.

It also depends on the asset, depends on your position. I think it is frothy on an overall basis, but there is still room for this wave to go.

What about other shale acreages?

Milisavljevic: I would not underestimate the other basins. A lot of it is overshadowed by the Permian at the moment, but let's not forget that the Eagle Ford is still pretty good, Scoop/Stack (Oklahoma) are still pretty good. I wouldn't just discount the rest of the continental United States.

There are folks that come to talk to us about those quite often — it is not with the frequency and scale the Permian commands, but there is quite a bit of interest. On the other side is Bakken (in North Dakota), which is more a story of consolidation and pullout of fringe and non-core positions. So it is a different rationale, but it is still M&A. It is not that you cannot make Bakken work, you just have to have a position in the right place. The Utica/Marcellus is always interesting, and Haynesville has been heating up in the last year as well.

What is your big-picture view? What are you telling your clients on the outlook of the market?

Milisavljevic: What we have been telling them is: welcome to recovery. This is how it looks like. As far as price recovery is concerned, unless there are big disruptions, it will be wise not to expect massive price recovery down the road. Maybe disruptions come in and we are in a completely different playing field. But absent of that, the dynamics are such that it is hard to envision a case where we are going to be short of production at least in the next few years.

So price recovery is here, and profit recovery is going to happen on efficiencies and on the cost side. Those will be somewhat offset by the loss of capabilities we have had in the industry. We have had a massive human capital loss in the industry with all the layoffs, we have had supply chain loss and production capability has gone away as some assets have been mothballed. We don't even know how much of the cold-stacked stuff is actually going to be deployable. So there will be some cost escalation in the supply chain as activity picks up. You have to be very cautious about coming in and jumping in.