Enverus: Oil And Gas Industry Mergers Dropped 13% During 2022

Energy‚ Oil & Gas‚ Oil and Gas Industry | intent | January 26, 2023 | Comment off

In its annual report detailing activity around mergers and acquisitions (M&A) for the upstream sector of the oil and gas industry, energy intelligence and analytics firm Enverus finds that deal activity slowed significantly during 2022. The report’s authors said in a release that M&A transactions fell by 13% on a year-over-year basis.

Enverus identified 160 deals totaling about $58 billion for the calendar year, with just 26 transactions totaling $13 billion coming during the 4th quarter. Overall, the analysts find that, while the average deal value fell by only about 20%, the volume of transactions collapsed to a two-decade low.

“Large-cap public companies like Devon EnergyDVN +0.3%, Diamondback EnergyFANG -0.1%, and Marathon OilMRO 0.0% dominated deal activity in the back half of 2022,” Andrew Dittmar, director at Enverus Intelligence Research, said in the release.

“These buyers have the balance sheet strength and favorable stock valuations to take advantage of large, high-quality offerings from private sellers. Critically, they can strike deals that both accretive to current cash flow and extend their runway of drilling locations. For smaller companies, which are still having their equity value discounted, it is challenging to thread the needle of buying assets at accretive multiples and being able to pay for inventory.”

Continuing with the “bigger is better” theme that has dominated the shale industry in recent years, Enverus attributes the dramatically lower number of deals during the year to the acquiring companies seeking to identify targets with $1 billion-plus valuations and the highest quality assets. During the 4th quarter, only 4 such deals were completed, as shown in the table below. Big Permian Basin producer Diamondback was the acquiring company in two of those deals, taking over both Lario Oil & Gas and Firebird Energy, a pair of fellow Permian operators. The combined total of those deals came to slightly over $3.1 billion.

Marathon was also able to improve its inventory in the Eagle Ford Shale in South Texas with its $3 billion acquisition of Ensign Oil & Gas. Enverus notes that these deals enabled the acquiring companies to add more than 500 new future drilling locations to their portfolios, both of which now encompass more than 10 years of planned drilling activity.

The biggest 4th quarter deal, though, came in an uncommon form of acquisition. That $5 billion transaction resulted from the decision by longtime CEO Harold Hamm and his family to privatize the public portion of Continental Resources by acquiring it.

Enverus notes that that was a fairly unique transaction given that the Hamm family already owned the rest of Continental, but does identify Comstock Resources, in which Dallas Cowboys owner Jerry Jones holds a big stake, as a potential future target for such a transaction. The report also mentions Occidental PetroleumOXY +0.1% as a possible target, should Warren Buffet and Berkshire Hathaway decide to consolidate the company as a private investment.

Dittmar sees the M&A market remaining somewhat active during 2023, as the bigger producers will continue to strive to extend their inventories. “The challenge for deals, as is often the case in this industry, will be bridging the bid-ask spread and navigating commodity price volatility,” Dittmar said. “Oil prices are likely to be steady or rising during the first half of the year while gas struggles, meaning more oil deals and fewer for gas to start 2023. However, we could see interest in buying gas assets mid-year to take advantage of low prices ahead of a U.S. LNG export ramp that will eventually drive gas higher.”

So, most likely more of the same. This slower pace of M&A activity is not surprising given that it comes at a time when the pace of overall activity in North American shale plays has moved out of the early drilling boom and into a longer-term development phase of the normal life cycle.

One the one hand, the bigger, high-quality deals will likely continue to be harder to identify and complete. On the other hand, though, life for all stakeholders in these regions will probably be calmer and more predictable.

SOURCE:https://www.forbes.com/