Driven by a surge of smaller upstream transactions, U.S. energy M&A activity in second-quarter 2016 experienced a 31% increase in volume over the first quarter and a 9% bump against the same time period a year ago, PwC said in its second-quarter 2016 quarterly report.

But the increase in number paralleled a sharp decrease in value as companies concentrated on core assets instead of transformational megadeals. The midstream sector in particular saw total deal values drop 81% from the first quarter of 2016, and 88% from second-quarter 2015.

“Deal activity in the midstream space, for the second consecutive quarter, has taken a significant decline in both volume and value, really reflecting difficulties in getting transactions to the announcement stage,” Doug Meier, U.S. oil and gas sector deals leader for PwC, told Hart Energy.

“Many of the midstream companies are facing dual headwinds from tight cash flows, and also their access to the capital markets has been significantly restrained relative to the access that they had to the second half of 2015.”

And it won’t get better for the midstream sector any time soon.

“For the second half of the year, we expect for the midstream space to remain subdued unless things turn around in the capital markets,” Meier said.

“If you look at the average deal in the midstream space in the last quarter, it was only about $488 million, which is down from $1.5 billion in the first quarter. The first quarter, from a volume and a value perspective, was relatively low vs. what we saw in 2013 and 2014. It’s obviously a very difficult deal environment today in the midstream space.”

PwC’s sense, though, is that an industry recovery has either started or will start very soon.

“Things are starting to bottom out from an industry perspective, from a supply-demand perspective, which is starting to produce green shoots of a recovery,” Meier said. It’s unlikely to be a V-shaped recovery, he added, but pointed to indications that inspire hope.

“From an M&A perspective in the second quarter, we started to see a significant increase in the number of transactions announced in the E&P space,” he said.

The deals tended toward leveraged companies disposing of assets to raise capital for the purposes of shoring up balance sheets or paying down debt. Numerous companies shed noncore assets to fund investment programs, Meier said.

“We expect those types of fairway transactions will continue,” he said. “We would expect to continue to see megadeals, but we don’t expect them to return to the level that we’d seen in 2014 and even the first half of 2015. Most companies really focus on the core within the fairway types of transactions.”

Meier said this trend is opposed to the four announced transactions in the downstream sector with total value of $635 million, which are falling far short of the $1 billion requirement for a single megadeal.

“From a deals perspective, we historically have not seen a lot of M&A,” Meier said. “Growth expenditures there are on the capex side vs. M&A. Other than the periodic megadeal in the downstream space, we just don’t see much historical activity in downstream.”

On a shale play basis, only the Permian Basin and the Marcellus Shale reported increases in volume and value. The Utica Shale, neighbor to the Marcellus, has not seen a major transaction of more than $50 million since third-quarter 2015, Meier said, though that could change.

“From the perspective of interest, what we’re seeing is that it’s fairly concentrated on areas such as the Permian, still the Eagle Ford and the Marcellus,” he said. “We wouldn’t be surprised if we do see a pickup in that activity in the Utica.”

Joseph Markman can be reached at jmarkman@hartenergy.com and @JHMarkman.