The last two energy crises that threatened hundreds of energy companies with bankruptcy have rewritten the oil and gas M&A playbook. Previously, oil and gas companies made numerous aggressive tactical or cyclical acquisitions in the wake of a price crash after many distressed assets became available on the cheap. However, the 2020 oil price crash that sent oil prices into negative territory has seen energy companies adopt a more restrained, strategic, and environment-focused approach to cutting M&A deals. According to data released by energy intelligence firm Enverus, cited by Reuters, U.S. oil and gas dealmaking contracted 65% Y/Y to $12 billion during the second quarter, a far cry from $34.8 billion in last year’s corresponding period, as high commodity price volatility left buyers and sellers clashing over asset values.
But dealmaking in the U.S. oil patch is now slowly starting to recover, with Enverus noting that mergers and acquisitions picked up pace to $16 billion in the third quarter, the most this year.
In its quarterly report, Enverus notes that the 3rd quarter was the most active quarter in oil and gas so far this year. Still, deal value in the first nine months only totaled $36 billion, significantly less than the $56 billion recorded in the same period last year.
“Companies are using the cash generated by high commodity prices to pay down debt and reward shareholders rather than seeking out acquisitions. Investors still seem skeptical of public company M&A and are holding management to high standards on deals. Investors want acquisitions priced favorably relative to a buyer’s stock on key return metrics like free cash flow yield to give an immediate uplift to dividends and share buybacks,” Andrew Dittmar, director of Enverus, told Reuters.
Third Quarter M&A Deals
According to Enverus, the biggest M&A deal last quarter was EQT Corp’s (NYSE: EQT) $5.2 billion purchase of natural gas producer THQ Appalachia I LLC as well as associated pipeline assets of XcL Midstream. THQ Appalachia, which is owned by privately held gas producer Tug Hill Operating.
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EQT said the assets acquired include ~90K core net acres offsetting its existing core leasehold in West Virginia, producing 800M cfe/day and expected to generate free cash flow at average natural gas prices above ~$1.35/MMBtu over the next five years. The company also doubled its buyback program to $2B, and said it is increasing its year-end 2023 debt reduction goal to $4B from $2.5B.
Last year, EQT unveiled a plan centered on producing more liquified natural gas by dramatically increasing natural gas drilling in Appalachia and around the country's shale basins, as well as pipeline and export terminal capacity, which it said would not only boost United States energy security, but also help break the global reliance on coal and on countries like Russia and Iran. Its latest acquisition will, therefore, help the company meet its goal. EQT shares have nearly doubled in the year-to-date.
The second-largest deal last term was German asset manager IKAV’s $4 billion deal for Aera Energy, a California oil joint venture between Shell Plc (NYSE: SHEL) and Exxon Mobil (NYSE: XOM). Operating mostly in central California's San Joaquin Valley, Aera is one of California's largest oil producers at 125K bbl/day of oil with 32M cf/day of natural gas, generating ~$1B in cash annually. A year ago, Reuters reported that Shell wanted to exit the venture, and Exxon later joined the effort, assisted by financial advisor JPMorgan Chase.
Back in September, oil and gas mineral and royalty company Sitio Royalties Corp. (NYSE: STR) is merged with Brigham Minerals (NYSE: MNRL) in an all-stock deal with an aggregate enterprise value of ~$4.8B thus creating one of the largest publicly traded mineral and royalty companies in the United States.
Like the rest of the industry, Sitio and Brigham have seen both their top-and bottom-lines expand at a brisk clip on the back of rising oil prices. Combining the two companies will allow the new entity to achieve significant economies of scale and become a leader in the minerals-rights industry.
The merger created a company with complimentary high-quality assets in the Permian Basin and other oil-focused regions. The combined company will have nearly 260K net royalty acres, 50.3 net line-of-sight wells operated by a well-capitalized, diverse set of E&P companies, and a pro-forma Q2 net production of 32.8K boe/day. The deal is also expected to bring in $15 million in annual operational cash cost synergies.
Sitio and Brigham shareholders received 54% and 46% of the combined company, respectively, on a fully diluted basis. Sitio Royalties recently reported a Q2 net income of $72M on revenues of $88M.
Another notable deal: Diamondback Energy Inc. (NASDAQ: FANG) has entered a deal to acquire all leasehold interest and related assets of FireBird Energy LLC for $775 million in cash and 5.86 million Diamondback shares with the deal valued at $1.6 billion.
Eagle Ford In Focus
The Eagle Ford was the hardest-hit region in the U.S. shale patch, and has lagged behind other regions during the ongoing ramp-up in production. But as energy analytics company RBN Energy has noted, M&A and drilling have lately been surging in the shale play.
To wit, two weeks ago, Marathon Oil (NYSE: MRO) announced that it has entered into a definitive agreement to acquire the Eagle Ford assets of Ensign Natural Resources for $3 billion. Marathon says it expects the deal will be "immediately and significantly accretive to key financial metrics," and will drive a 17% increase to 2023 operating cash flow and a 15% increase to free cash flow, immediately enhancing shareholder distributions.
In late September, Devon Energy (NYSE: DVN) closed on the $1.8 billion acquisition of privately held Eagle Ford producer Validus Energy. According to Devon, this acquisition secured a premier acreage position of 42,000 net acres (90% working interest) adjacent to Devon’s existing leasehold in the basin. Current production from the acquired assets is ~35,000 Boe per day and is expected to increase to an average of 40,000 Boe per day over the next year.
Earlier, EOG Resources (NYSE: EOG) announced plans to significantly expand its production of natural gas at its Dorado gas play in the Eagle Ford. EOG has estimated that its Dorado assets hold ~21 trillion cubic feet (Tcf) of gas at a breakeven cost of less than $1.25/MMBtu.
Drilling activity is also up in the Eagle Ford, with the region now home to 71 rigs compared to just 20 a year ago.
Overall the U.S. shale drilling and fracking activity is showing good signs of a rebound with current rig count of 779 a good 223 rigs higher than a year ago. But a full recovery is far from guaranteed: EOG has forecast that overall U.S. oil output will increase by between 700,000 and 800,000 barrels per day this year. However, EOG's top executive has warned that next year's gains will likely trend lower. Pioneer Natural Resources (NYSE: PXD) has an even gloomier outlook, predicting that U.S. production will only increase around 500,000 barrels per day this year, one of the lowest forecasts by any analyst, and fall even lower than that in the coming year.
Whereas RBN Energy has been touting the ongoing resurgence in the Eagle Ford, looking at the bigger picture reveals the rebound is far from established and is yet to measure up to the sharp ramp up in the 2012-2015 period. This applies across the entire U.S. Shale Patch as oil executives limit their expansion and prefer to return excess cash to shareholders.
Source: U.S. Energy Information Administration (EIA)
A week ago, the Energy Information Administration (EIA) released its latest Short Term Energy Outlook (STEO) wherein it revised its 2022 and 2023 oil production outlooks. The new projections have elicited mixed reactions across the board, with Bloomberg saying, “The projection suggests the pace of U.S. shale growth, one of the few sources of major new supply in recent year, is slowing despite oil prices hovering at around $90 a barrel, about double most domestic producers’ breakeven costs. If the trend continues, it would deprive the global market of additional barrels to help make up for OPEC+ production cuts and disruption to Russian supplies amid its invasion of Ukraine.”
Recently, Norwegian energy intelligence firm Rystad Energy revealed that a mere 44 oil and gas lease rounds will take place globally this year, the fewest since the year 2000 and a far cry from a record 105 rounds in 2019. According to the Norwegian energy analyst, only two new blocks had been licensed for drilling in the U.S. as of the end of August this year with no new offers for oil and gas leases originating with the Biden administration itself. Indeed, the handful of auctions that have gone ahead under Biden or bled into his presidency were decided upon during the presidency of Donald Trump. Meanwhile, Rystad has revealed that Brazil, Norway, and India are the world leaders in terms of new licenses.
We can, therefore, surmise that a rebound in M&A, as well as drilling activity, might not necessarily translate into a full shale comeback especially given the new shale playbook of limiting spending, high inflation as well as high cost of labor and equipment.
By Alex Kimani for Oilprice.com
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