Q2 oil and gas mergers and acquisitions hit by volatile equity and commodity markets
Energize Weekly, July 20, 2022
Oil and gas sector mergers and acquisitions (M&A) buffeted by market volatility slipped in the second quarter of 2022 to $12 billion – an 18 percent decline from the first quarter and a third of what it was a year earlier, according Enverus Intelligence Research.
Increased volatility in commodity prices led to the quarter getting off to a slow start with April posting the lowest monthly merger and acquisition deals in two years. That was followed by an uptick in private equity (PE) activity seeking to take advantage of high oil and gas prices.
Still, mergers and acquisitions faced headwinds from volatile commodity and equity markets, which made it difficult to value assets, Enverus, an industry consultant, said.
“As anticipated, the spike in commodity prices that followed Russia’s invasion of Ukraine temporarily stalled M&A as buyers and sellers disagreed on the value of assets,” Andrew Dittmar, director at Enverus Intelligence Research, said in a statement.
“High prices, though, also encouraged a rush by PE firms to test the waters for M&A. While not everyone that is going into the market is getting what they deem to be a suitable offer, enough are to drive modestly active upstream M&A,” Dittmar said.
Private equity and private oil and gas companies were “jumping on the chance” to cash out on high commodity prices while buyers remain wary of market commodity price swings, depressed equity markets and the prospect of higher interest rates.
“Looking forward I don’t think we will see any shortage of assets available for sale by private equity firms across every major shale play,” Dittmar said. “The challenge is finding buyers willing to pay their asking prices.”
The largest deal among exploration and production companies, in the second quarter, was the $4 billion merger of Colgate Energy Partners with publicly traded Centennial Resource Development. The transaction created the largest pure play in the Delaware Basin, part of the Permian Basin, and provided a major increase in scale for Centennial.
The Permian Basin, which straddles Texas and New Mexico, accounted for nearly 50 percent of the value for all deals in the quarter, while deals involving multiple basins – such as Riverbend Energy Group’s sale of assets in five basins for $1.8 billion – were 25 percent of the value for the quarter.
Deals involving natural gas assets were particularly challenged by commodity price volatility. Spot prices for a million British thermal units at the Henry Hub began the year at $3.74 and then rose as high as $9.44 in early June, according to the U.S. Energy Information Administration (EIA).
Since then, the price has fallen back to $6.81, and the EIA is projecting the average price will be $5.97 in the second half of 2022 – a 44 percent cut from the agency’s initial forecast.
“Gas accounts for $1.4 billion in activity, 11 percent of the total,” Enverus said. “The lack of gas deals is understandable given the challenges of pricing assets with the underlying commodity volatility.”
Assets comprising both oil and gas made up 65 percent of the merger and acquisition value for the quarter. Oil-based deals started to pick up late in the quarter, and oil prices stabilized around $100 a barrel, “but increasing recession fears could chill activity,” Enverus said.