Upstream M&A’s Promising Start Blunted by Ukraine War, Wild Prices

A promising first quarter of M&A retrenched in March as Russian forces invaded Ukraine and sent commodity prices into bewildering syncopation not unlike the score of a horror movie.

The first quarter saw announced transaction values of about $14 billion, including a January that opened with $6 billion in deals, and was the strongest start in the E&P sector in five years, according to an April 13 report by Enverus.

“All the factors that kept upstream deals resilient in 2021 carried over into the new year,” said Andrew Dittmar, director at Enverus. “That included a need for inventory by public companies, ready private sellers and favorable pricing. However, the volatility in energy prices caused by Russia’s invasion of Ukraine stalled nearly all deals in March.”

Before the latest stretch of price volatility, upstream deals were pricing cheaply on most metrics relative to historical averages, Dittmar said. With buyers cautious about raising offers to match rising commodity prices, deals began to stall in the face of new bid-ask spreads.

“The quick surge in commodity prices that accompanied the war in Ukraine has particularly blown out the gap between what buyers are willing to pay and sellers expect to get. And because they are so far apart, we have seen a pause in upstream deals,” he said.

RELATED:

VIDEO: What Chesapeake’s Chief Oil & Gas Acquisition Reveals about Upstream Dealmaking

Private company exits continued to be a “primary theme” to start 2022 and made up four of the five largest deals. Tops among such deals was Chesapeake Energy Corp.’s $2.6 billion acquisition of Chief Oil & Gas and nonoperated interest held by Tug Hill.

By play, deals in the Rockies swelled to about 50% of total first-quarter value, driven by interest in North Dakota’s Williston Basin and Colorado’s Denver-Julesburg (D-J) Basin. The Permian Basin also remained a magnet for deals with 30% of value while the Marcellus Shale and eastern U.S. captured 20% of value.

Enverus noted that the Haynesville and Eagle Ford remained relatively quiet with few announced deals.

Corporate mergers, which have driven deal value in the post-COVID world were less common, though, in early March, Oasis Petroleum Inc. and Whiting Petroleum Corp. agreed to a “merger of equals” that the companies said was worth $6 billion. The planned combination will include 972,000 net acres of leasehold, average production of 167,800 boe/d and enhanced free cash flow generation to return capital to shareholders, according to the two companies.

In the fourth quarter, Enverus said about $25 billion in assets were up for sale and Dittmar said recent activity, including assets marketed by ConocoPhillips and Exxon Mobil Corp., hints at further activity for the remainder of the year.

But first prices will need to stabilize.

“There should still be plenty of upstream deals to be had,” he said. “Those can come from further private exits, noncore sales by the big producers like ConocoPhillips and Exxon Mobil, or the remaining smaller E&Ps finding merger partners. 

“We just need some stability in commodity pricing and an acquisition or two to benchmark deals to reignite what should be an active market.”