Asia, EU Buyers Warming Up to US Shale M&A Again—Jefferies

Foreign asset buyers have “mildly growing interest in the U.S.” oil and gas space, says Jefferies Managing Director Bill Marko.

And all it took was a prolonged global energy crisis to get there.

Interest has reemerged from buyers in Europe and Asia—Japanese firms, in particular—to own upstream production in the U.S., Marko said Oct. 23 during Hart Energy’s A&D Strategies and Opportunities conference.

“If you’re an [LNG] offtaker, you’re thinking about, ‘How do I lower the cost of supply?’” Marko said. “One way to do that is to own the assets.”

He cited continued interest in U.S. shale gas M&A by Japanese utility Tokyo Gas and French energy giant TotalEnergies.

TG Natural Resources (TGNR), a U.S. producer majority owned by Tokyo Gas, has deepened its roots in the Haynesville Shale through M&A.

Late last year, TGNR acquired its neighbor in the East Texas Haynesville—Rockcliff Energy II LLC—for $2.7 billion.

Now, TGNR is reportedly in discussions to acquire a large Haynesville block in Panola County, Texas, from Chevron Corp. The asset includes more than 70,000 mostly undeveloped Haynesville acres.

Paris-based TotalEnergies also continues to invest in U.S. natural gas production. In September, Total said it acquired a 45% stake in Eagle Ford Shale dry gas assets operated by Lewis Energy Group.

The deal follows an April acquisition, also from seller Lewis Energy, in which total acquired a 20% interest in the Eagle Ford’s Dorado Field. The Dorado Field is operated by EOG Resources.

Total also remains one of the largest producers in the storied Barnett Shale field near Fort Worth, Texas.

Other buyers have sought to lower their cost of supply in other parts of the energy value chain, such as U.K. chemicals refiner INEOS Group.

INEOS Energy acquired a large Eagle Ford package from Chesapeake Energy for $1.4 billion last year—part of Chesapeake’s quest to shed oily assets and become a pure-play gas producer.

The deal with Chesapeake, now known as Expand Energy, landed INEOS approximately 172,000 net acres and 2,300 wells in the Eagle Ford’s black oil window, primarily in Dimmit, La Salle and McMullen counties, Texas.

“You don’t have a lot of examples of people that have done deals lately—but as I said before, I would characterize it as emerging interest,” Marko said.

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Rebalancing market

Just a few years ago, U.S. oil and gas were deemed too dirty for investment by would-be buyers in Europe and Asia.

Marko knows this well—he’s conducted face-to-face business with clients in 25 different countries over his 45-year career in energy finance.

He recalls meeting with 10 different Japanese energy firms while on a business trip to Tokyo in December 2019.

“Nine of them led off asking us about ESG,” Marko said. “I had never discussed that with any company in any of the meetings I’d ever had previously.”

Reducing upstream oil and gas production and emphasizing clean energy investment was a common refrain across Europe, too.

“They all took their own paths, but it was all to go cleaner,” Marko said.

European majors Shell, BP, Eni, Equinor, Repsol and TotalEnergies each made public commitments to move away from upstream production.

In 2020, French utility Engie pulled the plug on an LNG import deal with NextDecade Corp.’s Rio Grande LNG export project in South Texas, citing the French government’s concerns over the project’s environmental impact.

“Then, Russia-Ukraine happened,” Marko said.

Indeed, the Russian invasion of Ukraine in 2022 led to a nearly unthinkable shakeup in the global energy landscape.

Russian natural gas exports to the EU and the U.K. declined by almost 40% during the first seven months of 2022, compared to the same period a year prior. Russian exports to Europe declined by almost 50% compared to the previous five-year average, according to a U.S. Energy Information Administration analysis.

After the invasion, Engie eventually came back to the table with NextDecade. The two companies announced a 15-year LNG sale and purchase agreement from Rio Grande LNG in May 2022—months after the war began.

Domestic and international pricing for crude oil and natural gas skyrocketed once the war began. Producers reaped huge profits.

Profits were so large—record-setting in many cases—that the U.K. and EU member states started to enact wartime windfall taxes on oil and gas company profits.

Windfall tax policies “cremated” many of the producers operating assets in the North Sea, Marko said.

So, some of those producers seeking greener pastures have started looking at upping investment in the U.S. Gulf of Mexico instead.

“They said, ‘We’ve got to diversify,’ and the next logical place to diversify is the U.S.,” Marko said. “A lot of those public and private companies started looking at the U.S.”

Of course, operating outside of your own home country has its challenges.

Some of the onshore joint ventures with foreign non-operated partners haven’t been as economic as those partners would have liked, Marko said. Some of those non-op stakeholders are seeking an exit.

“It’s probably more accurate to say they’re attempting to exit because a lot of the investments they made are underwater and they have a really hard time taking write-offs,” he said.

There are also talented incumbent players ready to take their place when they leave. Take the Canadian shale plays and oil sands projects, for example.

International producers have steadily been leaving or reducing their exposure to Canada over time.

Chevron was the latest: This month, Chevron sold assets in the Athabasca Oil Sands and the Duvernay shale to Canadian Natural Resources Ltd. for $6.5 billion.

TotalEnergies, Shell, Equinor, Marathon Oil and Devon Energy have also reduced their exposure to the Canadian plays over time.

“I think, again, people are sort of consolidating back home,” Marko said. “You’ve got a lot of really talented incumbents. You can fill a room up there in Canada with expertise, just like you can fill the room in here.”

Marko said there was a similar dynamic with Italy’s Eni agreeing to offload its Alaska assets to private U.S. producer Hilcorp Energy, a deal Jefferies worked on.

“People are looking pretty far away from their home court and saying, ‘Is that really giving me the returns that I want?’” he said.

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