Upstream Deal Values Rise in 2021 Despite M&A’s Slow End

Upstream M&A slowed in fourth-quarter 2021 but overall the year finished strong with a 25% increase in deal value, which soared to $66 billion, according to a report by Enverus.

In the second year of a COVID-influenced market, activity in first-quarter 2021 was uneven with a slow beginning. The year ended similarly to as it began as a $9 billion transacted in the fourth quarter tamped down values below the yearly $72 billion average seen from 2015-2019.

“Since the emergence of COVID, upstream M&A has been characterized by fewer, but larger, deals,” said Andrew Dittmar, director at Enverus. “During 2020 that took the form of public companies consolidating amongst themselves and in 2021 transitioned to a focus on rolling up private E&Ps.”

Dittmar added that the volume of deals remained depressed with 172 transactions in 2020 and 179 transactions in 2021 versus an average of nearly 400 deals per year before COVID.

In the fourth quarter, private equity-backed firms continued to exit their positions, with two of the top three deals of the quarter involving private-backed E&Ps selling to public companies. That includes GEP Haynesville selling to Southwestern Energy for $1.8 billion while Chisholm Energy’s oilier assets in the Delaware Basin were snatched up by Earthstone Energy for about $600 million.

The Permian’s Delaware Basin and the Haynesville Shale were the two most active plays of 2021’s final quarter, combining for 80% of the quarter’s deal value.

“Buyers have been largely focused on adding high-quality inventory to build out their runway and sustain the strong cash flow generation recently achieved,” Dittmar said. “The largest supply of inventory meeting buyers’ criteria is available for sale in the Delaware for oil and the Haynesville for gas. That is largely because both these plays had significant private investment in prior years that the sponsors are now looking to monetize via sales to a public company.”

Public on public deals also came to the fore, with Continental Resources making a dramatic entrance to the Delaware Basin in the fourth quarter with a deal to purchase Pioneer Natural Resources’ position there for $3.25 billion. Pioneer acquired the acreage in its merger with Parsley Energy during the height of the public company M&A boom in late 2020.

“Big time corporate M&A often leads to a subsequent wave of asset deals as buyers prune their expanded portfolios,” said Dittmar. “There was a bit of this during 2021 with noncore asset sales by Pioneer and Diamondback Energy, another buyer from the 2020 merger wave. There should still be plenty of room to run for deals though and we anticipate this to drive a resurgence in mid-size, asset-level deal making.”

For most of 2021, public companies were active buyers, though private equity hasn’t left the upstream space and, in some cases, are reloading their portfolios, Enverus said. In the Haynesville, Paloma Partners VI, an affiliate of EnCap, took smaller sized public Haynesville producer Goodrich Petroleum private in a $480 million deal during 2021’s fourth quarter.

Other private equity-backed companies, like Colgate Energy and Ameredev II in the Permian, have used M&A to build scale towards a size that would allow them to test the waters for an IPO. That has been through both third-party M&A and combinations within their own sponsors’ portfolio of companies, sometimes termed a “smashco” deal within the industry, Enverus said.

In late 2021, rumors of a Colgate IPO were reported, though it’s unclear how a market that has been relatively hostile to oil and gas would react to an oil and gas public offering.

“The IPO market has been substantively closed to traditional E&Ps for several years now, with just one notable offering since 2017—Vine Energy which only lasted six months as a publicly traded company before exiting in mid-2021 via a sale to Chesapeake Energy,” Dittmar said.

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A couple of companies now look likely to test whether newfound investor enthusiasm for the space translates into a willingness to support IPOs. “That should be one of the more interesting stories to follow in 2022,” concluded Dittmar.

Dittmar sees a continuation of the 2021 M&A market this year. The Delaware Basin and Haynesville Shale remain attractive to buyers and additional assets should be available on the market.

Much inventory also remains in the Midland Basin and northeast Marcellus, though Enverus said the market has had fewer sellers in those areas.

In other more mature regions like the Williston Basin and Eagle Ford, substantial high-production assets are likely to be placed on the market, possibly at prices that will draw a mix of public and private buyers.

A return to higher asset-level deal flow would smooth the boom-or-bust cycle of M&A that has characterized the two years since the emergence of COVID, Enverus reported. However, there may be fewer multibillion deals to buy public or private companies as so many of those deals have already transacted and strong commodity prices lessen the pressure on smaller companies to sell.