Oil industry mergers and acquisitions bounce back in the second quarter of 2021

Oil industry mergers and acquisitions bounce back in the second quarter of 2021

Energize Weekly, July 21, 2021

Mergers and acquisitions among oil and gas producers rebounded in the second quarter of 2021 with more than 40 deals totaling $33 billion, with seven deals each worth more than $1 billion, according to industry consultant Enverus.

In another sign of industry revival, the U.S. Energy Information Administration (EIA) is projecting crude output from the country’s seven major shale plays to rise in August by 42,000 barrels a day (bpd) to 7.9 million bpd after a 28,000-bpd increase in July.

The exploration and production (E&P) company deals were spread across multiple plays with the biggest being Cabot Oil and Gas’ acquisition of Cimarex Energy, with its Permian Basis and Midcontinent assets, for $9.25 billion, followed by Pioneer Natural Resources purchase of Permian operator DoublePoint Energy for $6.38 billion.

The value of the second quarter deals was the highest quarterly dollar figure since the second quarter of 2019, which had included Occidental Petroleum’s acquisition of Anadarko Petroleum for $55 billion, including debt. The quarter is also tied for the most announced deals above $1 billion, that hasn’t happened since 2014.

“Responding to investor pressure to operate more efficiently, E&P companies have prioritized consolidation,” Andrew Dittmar, an Enverus senior mergers and acquisition analyst, said in a statement. “With three extremely active quarters out of the last four, there has been more than $85 billion announced in upstream M&A during the prior 12 months.”

The nature of the acquisitions and the target companies have changed since last year when activity was focused on consolidation between public companies seeking to gain operation and administrative synergies and cost savings.

So far this year there are only two public company mergers of more than $1 billion: Bonanza Creek Energy’s $1.4 billion purchase of Extraction Oil & Gas in Colorado’s Denver-Julesburg Basin and the Cabot Oil & Gas-Cimarex Energy deal. Of those two, only the Bonanza Creek-Extraction merger had operational synergies.

Instead, publicly-traded companies are focusing on acquiring private and private equity-sponsored assets. Pioneer Resources-DoublePoint was the biggest of these deals, followed by Southwestern Energy’s entrance into the Haynesville Shale through its $3 billion acquisition of Indigo Natural Resources and EQT’s purchase of Marcellus Shale natural gas producer Alta Resources for $2.9 billion.

“The uptick in acquisition activity targeting private equity-backed E&Ps is likely a welcome relief for sponsors that were challenged to find exit opportunities over the last few years,” Dittmar said. “The deals targeting private E&Ps are less about cost-cutting synergies and more about adding inventory.”

The purchases are largely being made with the acquiring company’s stock, a contrast to past years when private sellers mainly took cash.

“Following a rally in equities that raised the valuation for public E&Ps, their stock represents an attractive currency to buy private and private equity-backed counterparts,” Dittmar said.

There is still potential for more merger and acquisition activity this year as private equity-sponsored E&Ps are still looking for an exit and public companies look to sell noncore assets.

“As long as there isn’t a sharp retreat in commodity prices, M&A activity is likely to remain strong during the second half of 2021,” said Dittmar.

The other $1 billion deals were Contango Oil and Gas’ purchase of Independent Energy for $4.5 billion and Civitas Resources acquisition of Crestone Peak for $1.2 billion.

Adding to the financial health of producers has been an increase in production and stronger oil prices. The growth in oil production is being powered by the Permian Basin. In four of the seven oil producing regions (the Anadarko, Bakken, Eagle Ford and Niobrara) output is projected to fall slightly in August and it is forecast to be flat in the Haynesville.

Output is expected to grow by 53,000 barrels a day in the Permian and by 2,000 barrels a day in the Appalachian.

In another sign of improvement, the EIA said operators drilled 549 wells and completed 818 in the main shale plays in June and that the number of drilled but uncompleted wells was down 269 to 6,252, the lowest since June of 2018.

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