By - Jim Vess

After a slow start, the pace of oil and gas M&A picked up in the second half of 2019

Energize Weekly, January 8, 2020

The pace of oil and gas mergers and acquisition (M&A) increased in the fourth quarter of 2019, after a strong third quarter, but the year still ended with deals far off the 10-year average when adjusted for one mega-merger.

There were $96 billion in M&A activity for 2019, according to Enverus, an industrial analytics company. The lion’s share, however, was Occidental Petroleum’s $57 billion purchase of Anadarko Petroleum. It was the single largest deal of the decade.

When the Occidental acquisition is removed, 2019 saw $39 billion in M&A activity – about half the average annual $78 billion in activity in the last decade, Enverus said.

Both investment and M&A activity were down in 2019 as shale drillers had borrowed heavily over the last few years to expand operation in North Dakota’s Bakken field, Texas and New Mexico’s Permian Basin, and the Eagle Ford Basin in Texas.

What followed was a dramatic increase in oil production and a lot of red ink on balance sheets, leading to a drawback by investors. “The available capital that made shale possible largely dried up in 2019,” Enverus said.

“Investors who funded the shale revolution over the last decade have become vocal in advocating for payouts and cut back on providing new capital,” Andrew Dittmar, Enverus senior M&A analysts, said in a statement. “That flowed through to limited M&A and a negative reaction to deals for much of the year. However, we saw an uptick in December in the pace of deals and more positive investor reactions to acquisitions. That should bode well for M&A in 2020.”

The rebound began in the third quarter when there were $17 billion in deals, which was close to the historical quarterly average of $19 billion. That was followed by another $11 billion in the fourth quarter.

Better balance sheets and smaller drillers willing to accept lower buyout values, as capital markets remain tight, are priming the M&A market.

“From a buyer’s perspective, there are opportunities to shop for private equity portfolio companies that are ready for an exit or acquire the small and mid-cap public companies that have been beat up on Wall Street,” Enverus said.

The largest deal of the fourth quarter was WPX’s $2.5 billion acquisition of EnCap Investment-funded Felix Energy II. The second biggest deal was Parsley Energy’s purchase of Jagged Peak Energy for nearly $2.3 billion. Both acquisitions were in West Texas’ Delaware Basin, which is part of the Permian.

The Permian Basin continued to be a key driver of U.S. oil growth and a significant contributor to M&A, accounting for more than 60 percent of Q4 2019 value.

“In the last ten years, we watched U.S. shale upend global energy markets and transform the U.S. into a net energy exporter,” Dittmar said. “We’re now at an inflection point where shale matures from a growth industry to one that generates dividends and share buybacks for its investors. Completing that transition and setting the stage for the next ten years will likely require a round of consolidation and 2020 sets up the needed pieces for this to occur.”

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