Despite what’s called a “difficult” market, merger and acquisition activity in the U.S. oil and gas industry maintained the momentum established in Q2, surpassing $17 billion in Q3, according to data released by data analytics company Enverus.
That Q3 total approaches the 2016-2018 historical quarterly average of $19 billion, and puts year-to-date M&A at more than $85 billion, according to Enverus, the former DrillingInfo.com, Kallanish Energy reports.
“Most public E&Ps are highly limited in access to external capital right now,” said Enverus senior M&A analyst Andrew Dittmar. “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.”
Broad geographic diversity
In contrast to prior years, when Permian Basin asset deals dominated, Dittmar said Enverus is seeing broad geographic diversity in the current market and a variety of deal types, including joint ventures and royalties.
Reaching into a region that has not often been at the forefront of deals, Hilcorp purchased BP’s Alaska business, including its Prudhoe Bay and Trans Alaska Pipeline System interests for $5.6 billion in the largest deal of Q3.
The next largest Q3 transactions were a pair of corporate mergers. Early in the quarter, Callon Petroleum purchased Permian and Eagle Ford producer Carrizo Oil & Gas for $3.2 billion in an all equity/debt transaction.
The deal has run into some investor opposition spearheaded by hedge fund Paulson & Co., which specifically cites the deal premium of 25%, and the addition of Eagle Ford assets to Callon’s Permian portfolio, as points of contention.
Top 5 US deals of Q3
|Hilcorp Energy||BP||$5.6 billion||Asset||Alaska|
|Callon Petroleum||Carrizo Oil & Gas||$3.2 billion||Corporate||Multiple|
|PDC Energy||SRC Energy||$1.7 billion||Corporate||DJ Basin|
|Spur Energy Partners||Concho Resources||$925 million||Asset||Permian|
Dodging those issues and potentially setting the template for corporate consolidation, PDC Energy acquired fellow DJ Basin producer, SRC Energy, in a zero premium stock and debt deal for $1.7 billion.
“There is a broad consensus that corporate consolidation is positive for the industry,” said Dittmar. “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.”
Private capital has partially stepped up
Outside of corporate-level deals, there is very little buying from public companies. Private capital has partially stepped up, most significantly KKR-sponsored Spur Energy, which has deployed more than $1 billion, including a $925 million acquisition from Concho targeting the New Mexico Shelf.
“Private equity looks to be largely sticking to their script from prior quarters and cautiously deploying capital on deals secured with significant cash flow,” commented Enverus Market research director John Spears. “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 consisting of approximately 77% debt assumption and roughly 23% cash to shareholders. We could see other small cap E&Ps with high debt and low share prices take similar buyout offers.”
Acquisition interest from abroad
While some public companies could announce all-stock acquisitions like Callon and PDC did in Q3, cash offers will likely need to come from the private market or the largest public companies, which still have substantial internally generated funds and high, investment-grade credit ratings.
Low company and asset prices in the U.S. are also starting to draw interest from abroad. Japanese LNG importer Osaka Gas purchased East Texas gas producer Sabine Oil & Gas for a reported $610 million.
A few days later, Colombia-based Ecopetrol signed a $1.5 billion joint development deal with Occidental targeting undeveloped acreage in the Midland Basin.
There were also a handful of Chapter 11 filings during Q3 including Halcon, Sanchez, and Alta Mesa. Thus far, the majority of Chapter 11 filings have ended in a recapitalization, with creditors taking control of the company, but there could be a shift to more liquidations via bankruptcy sales processes as some lose patience and see companies going through multiple reorganizations.
Moving into the final quarter of 2019, public companies are likely to remain highly focused on keeping capital expenditures in check while maintaining moderate production growth to deliver on promised free cash flow.
This post appeared first on Kallanish Energy News.