Dealmaking In U.S. Oil Is Slowly Starting To Recover
10.17.2022 By - NEWS

October 17, 2022 [] – 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 in Q2, 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 Q3, 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.

“Given how cheaply public E&Ps are trading, it can be a tall order to strike deals that are even more favorably valued than a buyer’s stock. That also limits how much money a buyer can pay for undeveloped locations that may not generate a return until drilled years later,” he noted.

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.

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.

Exxon has severally said that it wants to focus on Guyana, Brazil and liquefied natural gas (LNG) projects, and has disclosed divestments valued at more than $3B in this year’s second quarter, including in Texas, Canada and Romania.

Back in September, oil and gas mineral and royalty company Sitio Royalties Corp. (NYSE: STR) 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 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 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.

“This bolt-on acquisition adds significant, high-quality inventory right in our backyard. With over 350 locations adjacent to our current Midland Basin position, this asset adds more than a decade of inventory at our anticipated development pace, including inventory that competes for capital right away in Diamondback’s current development plan,” said Diamondback CEO Travis Stice.

Diamondback has a mandate to return at least 75% of free cash flow to stockholders while maintaining a “fortress balance sheet.”

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