Upstream Deals Hit Historic Lows Despite Late 2020 Merger Mania

After an anemic start, E&Ps raced to announce corporate combinations in the second half of 2020, providing a well-needed boost to the year’s deal value, according to an Enverus report published Jan. 6.

However, the late year wave of industry consolidation wasn’t enough to save a dismal year of A&D activity, which Enverus said is likely to continue into the New Year thanks to the uncertainty created by the ongoing COVID-19 pandemic. While big corporate combinations lifted M&A value to $52 billion, deal flow for 2020, as measured by the firm as announced deals, fell to historic lows.

“There was very little appetite on either the public or private company side for buying upstream assets in 2020 as preserving cash to pay down debt or return to equity owners was prioritized,” Enverus M&A Analyst Andrew Dittmar said in the report. “In particular, companies were unwilling to invest substantially in buying undeveloped land, a staple of past upstream deal markets.”

For 2020, Enverus counted only 140 announced deals with a reported value. According to the firm, the 2020 count is the lowest annual total since at least 2006 and roughly just one-third of average deal activity over the past 10 years.

“What asset deals did get announced were largely focused on acquiring existing production and cash flow, sometimes through bankruptcy sales,” Dittmar added.

By comparison, Enverus tracked $96 billion of U.S. oil and gas M&A in 2019 and $85.6 billion in deals in 2018. However, the 2019 number might be skewed by Occidental Petroleum Corp.’s $57 billion acquisition of Anadarko, which was the largest deal of the decade and the fourth largest oil and gas deal ever. 

As with 2019, corporate M&A dominated transactions overall, constituting nearly 88% of all 2020 deals, with few asset deals for producing properties. Royalty deals were also down markedly to $1.2 billion compared with $3.2 billion a year ago, according to Enverus data. 

The outlook for 2021 deal activity will depend largely on the trajectory of the COVID-19 pandemic, global economic activity and their associated impacts on commodity prices, according to the Enverus report.

Enverus noted a substantial backlog of noncore asset divestments for companies to pursue, particularly for those that participated in 2020’s corporate merger wave and now have expanded portfolios. The firm listed likely buyers would include some public companies but with a healthy contingent of private equity capital looking to take advantage of opportunities created by the downturn. Other potential buyers include energy-focused SPACs.

“Wall Street appears supportive of E&P deals, but with very specific expectations on deal structure and the quality of the merger target,” Dittmar said in the report. “The limiting factor for consolidation in 2021 will be the number of attractive merger partners left at the end of a very active year.”

Merger Mania

Upstream M&A accelerated dramatically in the second half of 2020, particularly in the fourth quarter with three multibillion-dollar mergers centered on the oil-rich Permian Basin.

“As anticipated, additional merger activity during Q4 centered on E&Ps with high quality lands and reasonable debt loads, and the Permian Basin is the most target-rich region under those criteria,” Dittmar said.

At $27 billion of deals, Enverus said fourth-quarter 2020 was the third most active quarter by value since oil prices lost their footing in late 2014. The Permian Basin, in particular, captured 83% of deal value in the fourth quarter though, for the year, Permian transactions accounted for 46% of transaction spending.

The biggest deal of the fourth quarter and of 2020 was ConocoPhillips Co.’s $13.3 billion acquisition of Concho Resources Inc. The Oct. 19 merger was quickly followed by news that Pioneer Natural Resources Co. intended to acquire Parsley Energy Inc. for $7.6 billion. Lastly, Diamondback Energy Inc. closed out the year with the acquisition of publicly traded QEP Resources Inc. and private equity-sponsored Guidon Operating for a combined $3 billion.

“The fact that three of the leading Permian independents—Concho, Pioneer and Diamondback—each participated in a deal implies a recognition by the industry that scale is vital for companies to remain relevant going forward,” Dittmar added.

For example, ConocoPhillips’ acquisition of Concho, one of the largest independent producers in the Permian Basin, is set to vault the Permian from a potential weak point in Conoco’s portfolio to a cornerstone of its global strategy, the Enverus report said.

Further, the merger of Parsley gives Pioneer combined control of nearly 1 million acres across the Midland and Delaware sub-basins and Diamondback’s dual mergers will build out its position in the heart of the Midland Basin.

Consistent with earlier deals in second-half 2020, such as Chevron Corp.’s Noble Energy acquisition and Devon Energy Corp.’s merger with WPX Energy, all the big fourth-quarter public company corporate deals were all-equity, low-premium combinations.

Corporate consolidation is likely to continue in 2021 as some of the industry’s small and midsize companies are desperately in need of scale, according to the Enverus report.

The Enverus report noted companies that went through a Chapter 11 restructuring in 2020 could emerge as potential merger partners but overall the list of possible participants in consolidation have largely been winnowed down in the past year.