The number of mergers and acquisitions (M&A) in the U.S. upstream segment fell last year to the lowest level since 2005, with buyers increasingly picky and targeting top-tier locations in larger deals, Enverus Intelligence Research (EIR) said in a new report this week.
The value of the deals also dropped in 2022—13% year over year—to $58 billion, transacted across a total of 160 M&As.
“While deal values are down just about 20% from pre-pandemic averages, the volume of deals has collapsed to a nearly two-decade low as activity has been driven by large companies targeting the highest quality assets in billion-dollar-plus deals,” Enverus said.
For most of 2022, especially in the latter half of the year, large listed companies dominated deal-making in the U.S. upstream sector. Public companies – including Diamondback Energy, Marathon Oil, and Devon Energy – took advantage of top-tier assets on offer from private sellers and made some billion-dollar-plus deals last year.
This year, the upstream M&A market in the United States will likely continue to be supported by the race of public companies to add more high-quality drilling inventory, according to Enverus.
In 2022, larger firms dominated the mergers market in the U.S. shale patch and struck multibillion-dollar deals to secure inventory that was immediately accretive to cash flows. Large public companies now boast strengthened balance sheets and favorable stock valuations, which gives them the ability to snap up premium drilling locations. But smaller firms, with low equity valuations, have struggled to fund acquisitions of top-tier assets, Andrew Dittmar, director at Enverus Intelligence Research, said.
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Hence, the smallest number of U.S. upstream deals since 2005.
The largest deals in the fourth quarter confirmed the trend of large public firms acquiring additional inventory for drilling. For example, Diamondback Energy, one of the largest Permian-focused independent firms, signed two separate deals for bolt-on acquisitions of Midland Basin assets, with each deal worth upwards of $1.5 billion and each immediately boosting Diamondback’s financial metrics and high-quality inventory.
“Our enhanced size and scale in the Midland Basin, along with our low-cost operations, puts us in an advantageous position to deliver differentiated near-term and long-term returns to our stockholders,” Diamondback chairman and CEO Travis Stice said in November, announcing the acquisition of the assets of Lario Permian, which was preceded by another bolt-on acquisition, of FireBird, the previous month.
“For Diamondback, adding inventory is more of a luxury than a necessity as the company already has more than a decade’s worth of top-tier inventory,” Enverus said in its report.
Marathon Oil, also well positioned with about 10 years’ worth of drilling locations economic down to $45 per barrel, added another 550 locations to its portfolio by buying private Ensign Natural Resources in the largest deal in the Eagle Ford since late 2018.
“Inventory life is where large caps have a substantial advantage over smaller rivals and investors recognize that by giving them a premium on their stock. In turn, they can use that premium to buy more assets. It is a market where the rich get richer,” Enverus’ Dittmar said.
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The biggest deal of the fourth quarter of 2022 was the family of Harold Hamm buying all the remaining stock in Continental Resources that wasn’t already owned by the Hamm family. But these types of deals are unlikely to be drivers of the upstream M&A activity in the future.
For smaller upstream companies, the most likely path forward is looking to add cheaper inventory and seize opportunities to buy assets considered non-core by the large-cap firms and put up for sale, according to Enverus.
The biggest challenge for deals will be commodity price volatility. With oil prices expected steady or higher in the first half of 2023, it’s likely that the upstream deals will involve mostly oil assets at the beginning of this year, at the expense of gas-weighted assets, Dittmar concluded.
By Tsvetana Paraskova for Oilprice.com
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