Jordan Blum, editorial director, Hart Energy: We're here at NAPE in downtown Houston. I'm joined by Andrew Dittmar, the senior vice president for Enverus Intelligence. Thank you so much for joining us. You're kind of the M&A expert. I wanted to get you to start out by contrasting 2023 deal making versus what we're going to expect this year, especially on the tail of Chevron- Hess and Exxon- Pioneer.

Andrew Dittmar, senior vice president, Enverus Intelligence: Sure, absolutely. Thank you for hosting this. Always happy to be here at NAPE and great to be talking to Hart. We're coming off a historic year in 2023. We had $192 billion in upstream M&A, the highest year we've seen even beating out the late ’90s, early 2000s when the supermajors were put together. Really driven by a strong last quarter of the year, $144 billion in Q4, the two big megadeals, Exxon buying Pioneer, Chevron buying Hess. But even prior to those deals, we were looking at a pretty active market, kind of on trend for the say $60 billion to $70 billion average post COVID-19 market. Lots of private equity sales still, particularly focused on the Permian Basin. We've had $80 billion plus in private equity exits in the Permian since 2021. And then the new feature we saw in M&A markets that picked up in 2023 was the corporate M&A.

So those two really big deals I mentioned, as well as some smaller exits, things like Permian Resources buying Earth Stone and Chevron buying PDC in the DJ Basin. I don't think we're going to replicate $192 billion in upstream M&A, it's a pretty easy directional call to make. It's not that there's any less buyer appetite out there. Buyer appetites continue to increase, it's really an inventory story. Companies know that they need to secure inventory to maintain these generous cash flow programs that they have in place, and there's less of it to go around than what we thought tier one and tier two inventory is being drawn down. So it's really trying to find those deals, find those companies and assets where you can add high quality inventory to your portfolio, extend cash flow duration that's driving this M&A market. The wrinkle for 2024 is just again, remaining targets. 

When you scale across the landscape of private equity portfolio companies that are left, it's getting pretty thin, particularly in the Permian where there's been so much of a focus on M&A. There's a few big private family companies, Endeavor is a name that comes up in a lot of our talks, potentially looking at going to market and would be a $25 billion plus potentially a $30 billion deal. There's private company Mewbourne, which we don't know if they're going to go to the market, but it would be another one that would get a lot of buyer attention from some really big companies.

Beyond that, we anticipate a little bit more action on the gas side. Obviously we've already seen that with Chesapeake buying SWN (Southwestern Energy). That was enough to beat our gas M&A total for 2023, which was pretty anemic. And so another corporate deal there, a great acquisition that was very well received by the market, actually had one just announced before we sat down to talk in California. A little bit of a different deal, but California Resources Corp. buying Aera Energy. So we have gotten off to a good start for 2024 deals are still happening, but it is just eventually that opportunity is going to slow the market a little bit.

JB: Very good. Well, obviously a lot of the deal making will still be focused on the Permian, and you said there's not nearly as many privates to be bought. Mewbourne said they don't want to sell. Endeavor is probably, like you said, the next domino maybe to fall. But otherwise, are you expecting a lot more public to public deals?

AD: I think we will see more public to public deals. They're just tougher to put together. You need alignment from boards, management teams, investor bases and public companies aren't built for sale the way that a private necessarily is, particularly the private equity- backed model. But you look at some of the smaller sized companies, the mid cap space and their equity multiples are still pretty modest compared to where the larger companies are trading. So that creates an opportunity for companies to come in and buy these smaller sized peers and accretive multiples to their own trading price as well as cheaper than where we see some of the private deals pricing at. So Apache APA buying Callon earlier this year was a great example of that.

A largely southern Delaware focused company, they bought them for a slight discount in our view to the fundamental value of their production. So they were able to add Callon's inventory, which was still relatively high quality. They have about five years of sub 50 inventory, about seven years of total inventory and that is an upside for free on the deal. Comparable private transaction that we looked at would price at like $1 million to $1.5 million per location. So from a value accretion standpoint and a valuation standpoint, we think there's some attractive opportunities on the public to public side. It's just finding the right dance partner and getting your agreeable transaction ratio to make those happen.

JB: Easier said than done. So obviously with the Permian being more expensive and just fewer targets to acquire, are there any other basins you're keeping an eye on for maybe increased activity where companies might look?

AD: Yeah, absolutely. We do think to see more of a broadening of the M&A market in 2024 that could come from a few different directions. One, a natural follow on to these big corporate deals would be non-core asset sales as they pair back their portfolios, see what is a high quality asset, but maybe it's not going to have a place in the go forward plans for an Exxon or Chevron. We don't know for sure that's going to happen. There is a little bit of a tendency for the biggest companies to hoard inventory. They don't necessarily need the incremental cash that a non-core sale would bring about. Oxy (Occidental) is one that has said they want to target I think $4 billion plus in non-core asset sales. So you should see some come to the market there. In addition, there's a larger private opportunity set in place like the Eagle Ford, the Williston Basin and the Mid-continent SCOOP/STACK area. 

I think the Eagle Ford is one we're particularly excited about given the opportunity set that's there. There's some interesting rate of change stories with being able to go tighter on spacing in the core maybe than what people had thought. Opportunities to redevelop assets that were drilled in a very early era of shale and potentially under completed as well as an emerging Austin Chalk story there. So I think we will see some M&A in those plays. Just not enough to pick up sort of the lack of Permian deals to keep us sort of at this insane level we had in 2023.

JB: Now we mentioned Exxon and Chevron megadeals, but it's going to be a few months before they close and obviously the FTC is keeping an eye on those and reviewing those. Do you see much in terms of FTC antitrust issues continuing to rise in oil and gas?

AD: So I think we're going to probably hold status quo, which is extended review on these deals. FTC is going to ask for second request for information, put them through the ringer a little bit on antitrust concerns, but ultimately approve the deals. So we think it may be an additional extended process for Exxon and Pioneer, likely Chevron and Southwestern as well. But ultimately those deals get signed off on as EQT and Tug Hill, which is one that was fairly extended by the FTC. The only deal we've actually seen them step in and put a stop to was in the Uinta Basin and EnCap deal, and that was very localized. Specifically concerns about localized refineries that were set up to process a particular type of crude. It could be an impediment maybe on the gas side for future consolidation in Appalachia. If you were to have a tie up between two of the big publics, you could run into additional FTC review. It'll certainly be in the back of the mind of deal makers, but something that ultimately they're going to be able to work through on these transactions that have been announced so far.

JB: You mentioned Southwestern being acquired by Chesapeake. You also have TG Natural Resources (Tokyo Gas) acquiring Rockcliff Energy and Tellurian is putting maybe their Haynesville assets up for sale. How do you see that Haynesville consolidating and continuing to be a popular area, especially with access to LNG markets?

AD: We're ready to finally get excited about gas. We have to wait a little bit longer. I think it just dipped below $2 as we sat down to record this today. We think 2024 is going to be pretty rough for gas prices, but relief is on the horizon with us. LNG coming online, adding about 10 Bcf of demand on the gas side from these export facilities over the next 36 months. And the Haynesville is really the play that's situated to feed those LNG facilities, both from a resource quality perspective, an infrastructure perspective and just proximity to where the projects are being put in place. I think there's a lot of excitement around gas. There's excitement around the Haynesville from playing that LNG story and people are looking at deals there. The kind of obvious ones happened very quickly with Rockcliff and then the SWN- Chesapeake merger. 

As you kind of scale across the Haynesville, there's a little bit more room for M&A. The Tellurian one should be interesting. Just earlier this week they put out a press release that they were looking to sell their upstream assets in the Haynesville. So considerably smaller deals obviously than Southwestern or even the $2 billion plus Rockcliff deal, probably like a $500 million type deal there. But Aethon is still there as a very large private. If someone was to make an extremely large deal, which might be tough for one of the independents, they would be on the table for them. Additionally, there's some smaller privates that have inventory still in the Haynesville as well as some non-core sales from companies that aren't as focused on the Haynesville, but still have some decent quality acreage there. So incremental consolidation, but we may have seen some of the biggest fireworks already with the Rockcliff and SWN deal.

JB: Do those Rockcliff and SWN deals make good sense to you? Obviously the buyers have different motivations, if you want to touch on that.

AD: I think the Chesapeake- SWNs deal was one of the best we've seen received by the market. Chesapeake was able to outperform their index when they announced the deal, which has been surprisingly challenging for makers to do, even on deals that we really liked from a value accretion standpoint and price paid relative quality of the asset standpoint. It made a lot of strategic sense. Over $100 million in operational synergies for those two. The ability to get more exposure to international pricing, and Chesapeake's ability to garner investment grade credit rating and sign more takeaway contracts for LNG. Lots of upside on that deal. We think it made a ton of strategic sense.

Tokyo Gas wants the exposure as an end user of these gas to the U.S. upstream assets. Rockcliff was a very obvious target for them. There have been reports that they have been in talks for quite some time, but gas prices being volatile and often volatile to the downside took a while to get that across the finish line. But it makes a lot of strategic sense given their overall goals. We think both were priced reasonably. We had the SWN deal being a little bit cheaper if you want to work on a dollar per location metric versus Rockcliff, which gets back to that theme of private equity sales pricing at a premium to where public equities are and what you're able to acquire those for given the very modest or low premiums that sellers are getting.

JB: Very good. Are there any more predictions you want to make for 2024 and beyond before we wrap up?

AD: I think you hit on all the key ones. It should be exciting to see what the deal market brings. I think there's still some dry powder on the private equity side that's ready to step back into the space. They've been net sellers over the last three years. Fundraising is more challenging maybe than it was in previous cycles, but the money is still there, and I think there's some hungry people out looking for assets. So there should be an active market as long as we can find those sellers.

JB: Great. Well thanks so much for joining us here at NAPE. I really appreciate it. To read and watch more, please visit online at hartenergy.com.

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