A total of $96 billion of U.S. oil & gas merger and acquisition transactions took place in 2019, including $11 billion in the final three months of the year, according to data analytics firm Enverus.
However, the annual total was substantially skewed by Occidental’s $57 billion acquisition of Anadarko Petroleum, which was also the second-largest deal of the decade and the fourth largest oil & gas deal ever, Kallanish Energy reports.
Excluding Oxy-Anadarko, the U.S. in 2019 saw $39 billion in deals, or just one-half of the average $78 billion for annual U.S. oil & gas M&A during the last 10 years, which also saw the rise of U.S. unconventional assets.
Billions spent on shale assets in 2019
|Date||Buyer||Seller||Value||Deal type||US play|
|April 24||Occidental Petroleum||Anadarko||$57 billion||Corporate||Multiple|
|Aug. 27||Hilcorp Energy||BP||$5.60 billion||Property||Alaska|
|July 15||Callon Petroleum||Carrizo O&G||2.74 billion||Corporate||Delaware/Eagle Ford|
|Dec. 16||WPX Energy||Felix Energy II||$2.5 billion||Corporate||Delaware Basin|
|Oct. 14||Parsley Energy||Jagged Peak Energy||$2.27 billion||Corporate||Delaware Basin|
M&A played a key role along the way, with $567 billion spent on shale assets or 73% of the total during that time. E&Ps poured even more into funding drilling, including major ramp ups of oil output in the Bakken, Eagle Ford, and Permian Basin.
However, the available capital that made shale possible largely dried up in 2019.
“Investors who funded the shale revolution over the last decade have become vocal in advocating for payouts and cut back on providing new capital. That flowed through to limited M&A and a negative reaction to deals for much of the year,” said Enverus senior M&A analyst Andrew Dittmar.
Oxy-Anadarko highlights shale consolidation
Occidental’s acquisition of Anadarko highlighted 2019’s consolidation in the shale plays. The deal is in the “ballpark” of ExxonMobil’s 2009 $41 billion acquisition of XTO Energy as the most spent on shale in a deal. Occidental saw 75% of Anadarko’s value in shale, including the Permian Basin.
Most of 2019’s other marquee deals also focused on the Permian. After Occidental/Anadarko, 2019’s largest corporate deals were privately-held Hilcorp’s $5.6 billion buy of BP’s Alaskan assets, Callon Petroleum’s $2.7 billion merger with Carrizo Oil & Gas, WPX’s $2.5 billion buy of private Felix Energy II, and Parsley’s $2.3 billion acquisition of Jagged Peak Energy.
WPX’s $2.5 billion acquisition of private equity firm EnCap-funded Felix in December was notable for several reasons, according to Enverus. Besides being the largest deal of Q4 and fourth largest deal of 2019, “the acquisition of a premier private equity position in the Permian shows there are still exits available for the “built to sell” model of private equity portfolio companies.”
Permian continues as a key driver
WPX also outperformed the broader markets on news of the deal, compared to most buyers being sold off on news of M&A, Enverus said.
The Permian continues to be a key driver of U.S. oil growth and a significant contributor to M&A including accounting for more than 60% of Q4 2019 value. 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.
During the second half of 2019, smaller E&Ps showed an increasing willingness to accept lower buyout values as capital markets remained tight and financing options narrowed.
Limited options for low capitalized companies
Less well-capitalized companies that are still short of self-funding and generating positive free cash flow, have a limited set of options to avoid running up debt and facing a restructuring. Besides selling, some are turning to private capital to provide alternative financing options.
“Challenges for one company can mean opportunity for someone else and we’re seeing that on the private capital side,” remarked Enverus Market Research director, John Spears. “During the exploratory and high growth years of shale, private equity was funding companies to drill and flip acreage. Today, private equity is providing a secondary source of capital to companies that need to grow but don’t have the financial means via joint ventures, drillcos, purchasing overriding royalties, and other arrangements.”
Tight capital raising options for potential sellers is one side of the equation for an M&A surge in 2020. However, for would-be buyers the outlook is more positive. After a year of cutting costs and focusing on efficiencies, larger companies look ready to turn the corner on free cash flow and are instituting dividends and share buybacks to reward investors. Their stock prices are also on the rise, aided by a combination of their own operational improvements and tailwinds from an improving global economic picture and rising oil prices.
As investors grow more confident in a company’s ability to deliver on free cash flow, they also become more open to acquisitions, provided asset quality is high and the price is reasonable. In addition, larger E&Ps should be better positioned to deliver on returns to investors by leveraging economies of scale, more efficient development, and more favorable service and midstream contracts. Consolidation in the shale patch can either take the form of acquisitions by multi-nationals or mergers among the smaller to midsize players like was seen in 2019.
This post appeared first on Kallanish Energy News.