Oil and gas players are finally inking new mergers and acquisitions, after nearly two years of moribund deal activity.

Deal-making hit a soft spot following the 2014 oil bust as banks tightened lending to distressed drillers and buyers and sellers remained at odds over the value of energy assets. Now, climbing crude prices, easing capital markets, and a gold rush in Texas's prolific Permian basin are thawing a prolonged M&A freeze.

Through the first two weeks of November, upstream oil and gas deal-making hit $56.7 billion, compared with $26.8 billion seen in the same period last year.

A few deals in the midstream pipeline and storage sector and downstream refining and marketing space have made headlines recently, but the real recovery is being led by the upstream exploration and production sector — the part of the industry responsible for finding and extracting oil and gas.

In the third quarter, the total value for upstream transactions worth at least $10 million reached $20.2 billion dollars, according to data from PLS Inc., a Houston-based oil and gas research firm. That is more than double the level from a year ago and approaches levels not seen since the beginning of the oil price downturn.

In the third quarter alone, there were six deals worth a billion dollars or more in overall upstream M&A. Those generated $12.1 billion — more than all deal-making drillers drummed up in any quarter of 2015, according to consulting firm PwC.

"The increase in transaction activity in the exploration and production space really started in the second quarter, and that was on a slightly lagged timeline to when commodity prices started to recover," said Doug Meier, head of PwC's oil and gas sector deals practice.

A closer look at the data reveals that it's clear the stabilization of oil prices in a range between about $40 and $54 played a big role in the M&A recovery.

The activity is possible in large part because the gap has narrowed between what buyers are willing to pay and how much sellers are willing to accept, analysts said. But the nature of buying and selling is also shifting as the downturn enters its third year.

Many deals were made earlier this year because sellers needed cash to pay down debt, but now some private equity firms that bought energy assets have reached the end of their holding periods and need to divest them, PwC said in its latest quarterly report on oil and gas deal-making.

Deal data by region shows the recovery has been driven by some regions more than others — and one in particular: the Permian Basin, in western Texas.

The Permian is prized for its low-breakeven cost of producing a barrel of oil, leading to a gold rush of sorts that has sent acreage prices soaring there. It's been the epicenter of the recovery in the U.S. oil rig count since June.

What's interesting about the recovery is it's being heavily driven by sales of undeveloped acreage, as opposed to reserves that are already producing, said Andrew Dittmar, M&A analyst at PLS Inc.

In the third quarter, the value of acreage purchases of $25 million or more hit $11.3 billion, topping third-quarter 2014's total of $10 billion.
"If you're not in one of those top three or four plays, you're probably not going to get a lot of Wall Street support in your acquisitions."
-Brian Lidsky, PLS Inc Managing Director
The current business cycle is also remarkable because drillers have been able to slash capital spending in areas where production isn't economical, said PLS Managing Director Brian Lidsky. At the same time, they've wrung cost reductions from oilfield services firms and used technology to help them drill more efficiently.
"A prime example is the Permian Basin, where you are increasing recoveries significantly, at significantly lower costs, so you get a double positive on the economies of that play," he told CNBC.

Past recoveries "were mainly driven solely by price. This is a price and cost reduction recovery," he said.

Because the improvement in the cost structure differs so greatly from basin to basin, the industry isn't seeing a broad-based recovery, but one led by the high-value basins like the Permian and the natural gas-producing Marcellus Shale in Pennsylvania, Ohio and West Virginia.

There are deals occurring in areas beyond the Permian and Marcellus, but they are significantly smaller. Buyers in those areas are mostly adding land to their existing acreage — and they're more likely to make those purchases with cash on hand, rather than by tapping equity and debt markets, according to Lidsky.
"If you're not in one of those top three or four plays, you're probably not going to get a lot of Wall Street support in your acquisitions," Lidsky said.

That will matter moving forward, because the recovery has so far largely depended on buyers' ability to tap into equity markets, he explained. Banks that lend to the energy sector are still very hesitant to extend credit backed by oil reserves.

In a low price environment, the values of those reserves dwindles, so banks have been busy reducing drillers' borrowing ability, sometimes at the behest of regulators.

Lending to the energy sector has been on the decline. This past quarter, the value of stock offerings surpassed syndicated bank lending, or loans made by a group of financial institutions.

Elsewhere in the upstream sector, the M&A freeze has not yet thawed for oilfield services firms, with the notable exception of GE Oil & Gas's purchase of Baker Hughes, announced last month.

That is largely because oilfield services firms have not yet seen their prices stabilize, said PwC's Meier. The price collapse forced those firms to offer deep discounts to exploration and production customers.

"The $64,000 question is, 'When will these service providers be able to stabilize their prices?'" Meier said.