NEW YORK (The Deal) -- It's been a sad year so far for mergers and acquisitions in the oil and gas industry. There were only 150 deals worldwide with a value of $9.5 billion in the first two months of 2015, compared to 245 deals worth nearly $35.2 billion in the same period last year, according to Dealogic. Exploration and development M&A action has been really modest, amounting to only 35 deals with a value of $505 million, versus 51 with a value of almost $11.2 billion for the same period in 2014. Three of the largest deals were in Canada, topped by Kelt Exploration's purchase of Artek Exploration for a paltry $215 million. "There's been zero deal flow," Bill Marko, a managing director at Jefferies, said at the NAPE conference last month.

However, there has been one bright spot in the industry: the midstream. Deals for pipeline, processing and storage assets keep churning on, with 26 so far this year valued at $23.3 billion, compared to 24 worth only $4.6 billion during the same period last year. Among the biggest: Energy Transfer Equity's (ETEacquisition of affiliate Regency Energy Partners (RGP) for $17.9 billion, Kinder Morgan's (KMI - Get Reportpurchase of Hiland Partners from billionaire Harold Hamm and his family for $3 billion; and EnLink Midstream Partners (ENLK) and EnLink Midstream (ENLC - Get Reportbuying Coronado Midstream Holdings from privately held Reliance Energy, Diamondback Energy (FANG - Get Report) and RSP Permian (RSPP) for $600 million.

Why the disparity? Well, while it might make sense for oil and gas explorers and producers to go bargain hunting after the dramatic slide in oil prices, the truth is that many potential sellers are still in denial about their situation, and trying to survive by cutting capital expenditures and overhead rather than selling properties at what may be the low.

Indeed, investment bankers and private-equity executives lament the still-wide "bid/ask" spread: the difference between what buyers are willing to pay and what sellers are willing to accept. "M&A is much anticipated, but it's probably three to six months away," said Tom Petrie, a longtime oil and gas analyst and investment banker at Petrie Partners, on the sidelines of the Platts North American Crude Oil Summit last week.

Midstream companies, however, need to "feed the beast" -- they must continue making acquisitions to fuel their distributions. And with so many  companies in that business (140 by one count) chasing too few opportunities, consolidation was inevitable. Witness Enterprise Products Partners (EPD - Get Reportpicking up Oiltanking Partners from Oiltanking GmbH's Oiltanking Holding Americas for $6 billion (a deal that is under investigation by the Federal Trade Commission, probably for the storage position the deal gave Enterprise along the Gulf Coast); Targa Resources (TRGP - Get Report) and Targa Resources Partners (NGLSbuying Atlas Energy and Atlas Pipeline Partners for $7.7 billion; and Tesoro Logistics (TLLPbuying QEP Resources' (QEP - Get Report) midstream business for $2.5 billion.

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Midstream's near-term growth prospects, while still susceptible to broader oil and gas industry dynamics, appear to be brighter than those for the exploration and production sector, and may be poised for growth through M&A this year, Deloitte predicted in a recent report. The firm noted midstream firms' fee-based contracts and relatively stable, long-lived cash flows, which are appealing to investors, and the potential for expanding pipeline systems to support growing demand for natural gas -- both as a transportation fuel and as a cleaner energy source for industrial production and power generation. Master limited partnerships also generally have a lower cost of capital because they don't pay corporate taxes, as they distribute all their earnings to shareholders, so they can pay more for acquisitions.

Some will become takeover fodder. On the list of Global Hunter Securities analyst Sunil Sibal: Markwest Energy Partners (MWE) and Targa Resources Partners/Targa Resources Corp., which not too long ago walked away from a $16 billion buyout offer from Energy Transfer Equity. Midstream assets at some of the exploration and production C-corps are also expected to become available, he notes.

Private equity is also active in the space. Last month, Energy Spectrum Capital said it was investing an initial $150 million in Santa Fe Midstream to pursue opportunities in the infrastructure part of the oil and gas business across the U.S. And in January, Five Point Capital Partners said it raised $450 million in capital to pick up midstream assets and projects from distressed sellers, mostly in the Permian Basin and the Eagle Ford Formation.

Even T. Boone Pickens is jumping in: In January, his BP Natural Gas Opportunity Partners committed $20 million to Pinnacle Midstream, which plans to acquire and develop oil and gas infrastructure assets, and provide services in natural gas producing basins.

A lot of the midstream deals today are between affiliates, with companies "dropping down" assets to their MLPs. Arrangements of this type help the corporations bring in cash to fuel operations, expansion plans and acquisitions, and help the MLPs by boosting EBITDA, which can be used to pay distributions. Last month, for example, Valero Energy Partners (VLPpurchased the outstanding membership interests in Valero Partners Houston and Valero Partners Louisiana from affiliate Valero Energy (VLO - Get Report) for $671 million. Simmons & Co. International analyst Jeff Dietert said the deal implied an 8.9 multiple, which is smaller than the 9.5 to 10 multiple paid by peers over the past year and a half, and said he expects Valero Energy  to drop down more assets with $35 million in EBITDA later this year.

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"Sponsors play a very important role ... as incubators of assets, and then sell them when they get to a certain size to MLPs," said Ali Akbar, an investment banker who specializes in such deals at RBC Capital Markets. "So we have this nice equilibrium, or balance, in the space." Akbar expects the midstream M&A market to reach $40 billion to $50 billion this year, after reaching $140 billion last year (a number skewed by Kinder Morgan's $70 billion transaction to bring all of its affiliates under one roof).

Some moves to watch for: Antero Resources's (AR - Get Report) dropdown of its fresh water distribution assets into Antero Midstream Partners (AM), which will help it fund capital expenditures and reduce its debt load; and EQT (EQT - Get Report) dropping down its midstream assets to EQT Midstream Partners (EQM - Get Report); and Energy Spectrum Capital- and Tenaska Capital Management-backed Azure Midstream Energy dropping down its Center and Holly gathering systems to Marlin Midstream Partners, whose general partner it recently acquired.

The Energy Transfer-Regency deal was a bit different in that it was intended to simplify Energy Transfer's structure, much like Kinder Morgan did last year. But it's also expected to boost Regency's borrowing capacity so it can continue to expand despite low oil and gas prices. The deal made it the largest energy infrastructure master limited partnership in the U.S. after Enterprise Products Partners.

Enterprise Products Partners, meanwhile, is expected to take a disciplined approach while looking to participate in the M&A markets, especially if the asset prices continue to be bid up as witnessed in some recent midstream transactions, Global Hunter analyst Sunil Sibal wrote in a recent report.

It may be more challenging for midstream operators to launch new, large-scale projects due to reluctance among producers to make long-term commitments given lower commodity prices, Simmons & Co. International analyst Mark Reichman wrote recently, so M&A may continue to be a fact of life among these infrastructure builders. "After years of robust capital investment among midstream providers to accommodate significant supply growth of natural gas, NGLs and crude oil, growth opportunities going forward will be more challenging as the market seeks supply/demand equilibrium," he said. When that supply/demand equilibrium will happen is anyone's guess.

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