M&A Scorcher Augurs More Shale Deals in Second Half

Here’s something about Januarys—especially when they aren’t cold—that puts a chill in the oil and gas A&D market.

By spring, however, M&A in the U.S. had regained its footing with a sizzling $33 billion second-quarter from more than 40 deals—seven worth at least $1 billion, according to Enverus.

Andrew Dittmar, senior M&A analyst at Enverus, said that investor pressure to operate leaner made consolidation a priority.

“With three extremely active quarters out of the last four, there has been more than $85 billion announced in upstream M&A during the prior 12 months,” he said.

But the targets for mergers and acquisitions shifted in second-quarter 2021. During 2020, consolidation between public companies focused on operational and G&A synergies drove deals.

In 2021, only two public company combinations were tallied more than $1 billion: Bonanza Creek Energy Inc.’s $1.4 billion purchase of Extraction Oil & Gas Inc. in Colorado’s Denver-Julesburg Basin and Cabot Oil & Gas Corp.’s merger with Cimarex Energy Co. in a deal that valued Permian Basin and Midcontinent producer Cimarex at $9.3 billion. Only the Bonanza Creek merger offers operational synergies.

Public companies instead turned to the private market:

• Pioneer Natural Resources Co. agreed to a $6.4 billion deal for Midland Basin pure-play DoublePoint Energy;
• Southwestern Energy Co. will buy Indigo Natural Resources LLC for $2.7 billion; and
• EQT Corp. purchased the Marcellus’ Alta Resources LLC for $2.9 billion.

“The uptick in acquisition activity targeting private equity-backed E&Ps is likely a welcome relief for sponsors that were challenged to find exit opportunities over the last few years,” Dittmar said. “The deals targeting private E&Ps are less about cost-cutting synergies and more about adding inventory. That can be in a buyer’s home basin, like Pioneer/DoublePoint, or entering a new area as Southwestern did by acquiring Indigo in the Haynesville Shale.”

Private equity sponsors are receiving mostly buyer’s equity in these sales, with stock constituting about 70% of the value paid with the balance made up of cash and debt assumed. In past years, private sellers typically only wanted cash.

“Following a rally in equities that raised the valuation for public E&Ps, their stock represents an attractive currency to buy private and PE-backed counterparts,” Dittmar said.

Read more in the “A&D Refueled” cover story featured in the August 2021 issue of Oil and Gas Investor.