By Mark Jaffe, EUCI energy writer
The U.S. shale oil and gas sector is poised for a “new wave of consolidation” among small- and medium-sized producers facing an increasingly competitive landscape, according to industry consultant Rystad Energy.
“Scale and efficiency are key catalysts for exploration and production (E&P) players who are seeking favorable business valuations, with acquisitions emerging as a key calculation of shareholder value by rewarding operators who keep volumes high and costs low,” the Rystad Energy analysis said.
In the first wave of consolidation, larger companies were focused on increasing assets in core operating areas.
“These E&Ps missed out on the first wave and now have found themselves merging in deals for far lower multiples than were achieved in the last two years,” Rystad Energy said.
Smaller producers trying to survive the next round of consolidation will have to look for assets from larger operators seeking to unload properties or to acquire privately owned exploration and production companies.
Still, Rystad Energy said that it does not expect either route will provide adequate scale, leaving smaller operators to combine with other small operators in “a merger of equals.”
“This is likely a shift in strategy due to the scarcity of opportunities and an ever-evolving menu of acquisition options,” Atul Raina, Rystad Energy vice president of oil and gas M &A, said in a statement.
What might be on the table for smaller producers are non-core assets that ExxonMobil, Diamondback, Occidental, and ConocoPhillips are looking to shed. Still, these may not yield adequate production value.
Among the small- and middle-size companies that could be in the hunt for assets or become potential acquisition targets are Permian Resources Matador, HighPeak Energy, and Chord Energy.
“Other potential candidates that could emerge as consolidators or remain active in upstream M&A – driven by strategic portfolio positioning and valuation dynamics – include Coterra Energy, Ovintiv, and Devon Energy,” Rystad Energy said.
For example, Coterra and Ovintiv both have multi-basin strategies across the Permian, Marcellus, and Anadarko regions and have gas-weighted inventory. They are also comparable in size.
“A merger of near-equals between Coterra Energy and Ovintiv could present strategic merits while some key challenges remain,” Rystad Energy said. “Two paths emerge for these players – either grow inorganically by acquiring what the larger companies are selling or scoop up an operator of equal or lesser value.”
Even without as neat a fit as Coterra Energy and Ovintiv, operators are pursuing deals. For example, SM Energy merged with Civitas Resources in a $12.8 billion, all-stock deal. The Denver-based companies have resources across Colorado’s DJ Basin, the Permian in Texas, and the Williston Basin in North Dakota.
Houston-based Crescent Energy also acquired Tulsa-based Vital Energy in a $3.1 billion, all-stock transaction.
“Although smaller E&Ps are the most likely to be snapped up, they are also on a mission to punch above their weight by acquiring what’s left of the M&A waves experienced over the last two years,” Raina said.
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