U.S. oil and gas M&A reached $17 billion in Q3 2019 and $85 billion for the year

Energize Weekly, October 9, 2019

U.S. oil and gas sector mergers and acquisitions (M&A) ticked up in the third quarter of 2019 to more than $17 billion, putting M&A activity for the year-to-date at $85 billion, according to Enverus, an industry analytics company.

After a weak start to the year, deal activity was close to the historical quarterly average of $19 billion for activity for oil and gas exploration and production (E&P) companies.

“Most public E&Ps are highly limited in access to external capital right now,” Andrew Dittmar, an Enverus senior analyst, said. “Shale companies are turning to deals as another option in the toolbox to bridge the gap to free cash flow and hopefully shift market sentiment back in their favor.”

While in the past most M&A activity was in shale plays, in the third quarter about 42 percent of the deals involved assets and companies in shale plays with “much broader geographic diversity” and deals based on joint ventures and royalty deals, Dittmar said.

In the second quarter of 2019, there were a total of $65 billion in deals, but $57 billion of that was the acquisition of Anadarko Petroleum Corp. by Occidental Petroleum. The remainder of the activity was $7.6 billion. In the first quarter, there were just $2 billion in deals.

The largest transaction in the third quarter was Hilcorp’s purchase of the Alaskan business of BP, including its Prudhoe Bay and Trans-Alaska Pipeline System interests, for $5.6 billion.

The three next largest deals were all in shale plays. Callon Petroleum bought Carrizo Oil & Gas, which operates in the Permian and Eagle Ford basins, for $3.2 billion, and PDC Energy acquired SRC Energy for $1.7 billion. Both companies drill in Colorado’s Denver-Julesburg Basin.

The Callon-Carrizo deal has run into investor opposition, led by the hedge fund, Paulson & Co., with objections to a 25 percent premium offered for Carrizo and questions about the Eagle Ford assets.

Ecopetrol purchased the Permian holdings of Occidental for $1.5 billion in the third-largest deal of the quarter.

“There is a broad consensus that corporate consolidation is positive for the industry,” Dittmar, said. “While the benefits are there, getting the right deal in place is challenging. Companies that match up on asset fit are needed, as well as a low premium to avoid a buyer selloff. Conversely, targets have to be convinced on the long-term upside since an immediate payoff isn’t evident.”

Apart from the corporate acquisitions, there was very little activity from public companies with the rest of the deal-making coming from private equity firms. Spur Energy, backed by KKR, spent more than $1 billion in the quarter, including the $925 million acquisition of Concho Resources in Midland Texas.

“Private equity looks to be largely sticking to their script from prior quarters and cautiously deploying capital on deals secured with significant cash flow,” John Spears, Enverus market research director, said. “There are ample opportunities. In a quick start to Q4, Oklahoma producer Roan Resources is being taken private by Citizen Energy, an affiliate of Warburg Pincus, for more than $1 billion.” The deal consists of 77 percent debt assumption and 23 percent cash payments to shareholders.

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