From Oil and Gas Investor Editor-in-Chief: Golden Age of A&D

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[Editor's note: A version of this story appears in the June 2021 issue of Oil and Gas Investor magazine. Subscribe to the magazine here.]

A&D is back, and I’m not talking about corporate M&A where a favorite name waves goodbye and gets absorbed only to become tomorrow’s memory. That’s happened more than enough in recent months. I’m talking assets—production, wells, acres and maybe a pipe or two. After two years of deal drought, the A&D machine is coughing back to life and gaining traction.

I know this because a full day of live, in-person speakers at the A&D Symposium hosted by the Society of Petroleum Engineers Gulf Coast Group Business Development Section in May were practically giddy at the deals that transacted in the past few weeks.

Doug Reynolds, managing director with the energy and power team at Piper Sandler, went so far as to title his presentation “The Golden Age of A&D?” The question mark was only insurance in case his optimism was too hopeful.

“Before you think I am being ridiculous, you ought to know there’s $17 billion of transactions done so far this year, and we’re only in the middle of May,” said Reynolds.

Transaction activity is heating up quite well, he observed. Yet, while corporate mergers dominated the scene with $116 billion in deal value over the past two years, this year only $1 billion is attributed to such a marriage thus far, that one being the Bonanza Creek Energy Inc./Extraction Oil & Gas Inc. combo. “This is an asset market,” he said.

Reynolds and his team have identified several billion of assets currently on the market actively pursuing a transaction. Of course, relative commodity price stability supports dealmaking, and in his last few deals he’s advised on, “there’s been no discussion as to commodity price. There seems to be alignment around the strip right now.”

Interestingly, the buyers are predominately public companies, the same publics that wouldn’t touch an asset over the past year-plus as they would get their stock slapped by Wall Street. It turns out investors really do like growth, just not by the drill bit. Growth by acquisition is far less risky in investors’ minds.

And stock prices generally have responded well to recent acquisitions. “We haven’t seen a company announce something and the market throw up all over it, which is refreshing. Asset deals have been well received by the market.”

Another positive sign: Publics are stocking up on inventory, not just PDP reserves. “Public companies are running out of inventory,” Reynolds said. Where last year 90% of a deal value might be attributed to PDP and 10% to inventory, now the value attributed to upside “is materially higher.” Those who are still bidding on last year’s valuations that don’t include upside value, he noted, are getting outbid by 50%.

While conservatively staying in basin, publics are also looking to change their inventory profiles. “It’s very interesting to see public companies repositioning themselves.” Pioneer Natural Resources Co., Enerplus Corp., Oasis Petroleum Inc. and Laredo Petroleum Inc. have all fundamentally changed their profiles through acquisition within the past 12 months, he said. “These are not little bolt-ons for them. These are very significant transactions, even for a company the size of Pioneer. They’ve each changed the complexion of those companies rather significantly.”

Though buying too, private equity-sponsored companies are the most active sellers, finding clear runways to land the investments and unload returns to stakeholders. After a year of buyer desolation and aging waterfalls, the sponsors of these stranded portfolio companies are more than willing to take stock to achieve an exit, and the public buyers are more than willing to transact a portion of the value with stock.

“The private equity guys are smart sellers,” he said, and realize all-cash deals aren’t going to work for most buyers. “It has to work for the balance sheets of the acquirer, so they have to take some stock as consideration.” Forty percent of total deal value year-to-date has been paid in stock.

The good news for buyers is that—while the bank markets are tough and “are going to stay that way for a little while”—the bond markets are “super supportive. The return of the bridge is a phenomenon that’s happened in the last 30 to 60 days.”

Annualized, 2021 should end with some $50 billion in total deal value, he said, “which would be pretty significant.” Of that, he foresees one or two more corporate consolidations.

However, Reynolds predicts some $30 billion to $40 billion in asset transactions alone this year, on par with 2016 to 2018 in terms of total dollar volume of asset transactions. For A&D guys, whether buyers, sellers or advisors in the middle, that’s positive news.

“We see this as a heck of a year—and we may be about the same next year.”

The hiatus is over. Time to do some deals.