One of two drilling rigs operating for Earthstone Energy in the Midland Basin. Enverus' quarterly M&A report cited Earthstone as an example of companies buying assets for existing production while also eyeing future drilling locations.
Upstream mergers and acquisitions opened strong in the first quarter of 2022, according to a report on first quarter activity released by Enverus, the energy data analytics and SaaS technology company.
According to the report, there was $14 billion in deals announced during the quarter, and the $6 billion transacted in January alone was the strongest market launch in five years.
But as it has with almost every facet of the industry, commodity price volatility has upended dealmaking.
“Price volatility has halted the M&A market by blowing out the bid/ask spread between what buyers are willing to offer and sellers willing to accept,” Andrew Dittmar, director at Enverus, told the Reporter-Telegram by email. “We haven’t had a significant US upstream M&A deal since early March. It will take a return of stability in pricing to reignite the market.”
Overall, deals were most active in the Rockies region, comprising more than 50 percent of total first quarter value – driven in particular by buyer interest in North Dakota’s Williston Basin and Colorado’s DJ Basin oil plays. Dittmar said the region’s gas plays like the San Juan Basin have yet to draw buyer attention “although I certainly think they could going forward. Almost all gas deals have focused on the Marcellus or Haynesville, and gas overall only accounted for about 20 percent of deal value.”
The Permian, which he termed “always consistent,” captured a bit under 30 percent of deal value.
“The Permian is always going to be at the center of industry M&A trends as the largest oil play in the country. I think there is more room for consolidation in the Delaware versus the Midland as a more fragmented basin,” Dittmar wrote.
He added, “The big story is likely to continue to be private equity exits with some large names potentially coming up for sale in the future. There will also be offerings from the past buyers in big deals like ConocoPhillips continuing to sell non-core assets. Buyers will most likely be public companies that want to continue to build their inventory runway like Continental. Public company mergers are possible but not certain. Overall, a return to deals is first going to require commodity prices stabilizing a bit. We do seem to have a fair bit of support at current levels and could see prices finally stabilize.”
Private company exits accounted for four of the five largest deals of the quarter. Chesapeake continued its buildout of core gas-focused inventory in the northeast Marcellus by acquiring private Chief Oil & Gas and associated Tug Hill interests in a $2.6 billion transaction. While that deal was more focused on building inventory runway and Chesapeake was willing to pay for it, other buyers like Earthstone Energy in the Midland Basin and PDC Energy in the DJ Basin sought acquisitions that could be purchased solely for the value of existing production while still adding future drilling locations, the report said.
One of the deal types less susceptible to commodity pricing risk is what’s known as the corporate merger of equals. These deals, aimed at creating a larger and possibly more stable platform for investors, were more common in the early innings of the post-COVID market, the report said.
For his part, Dittmar sees continued room for consolidation.
“I think there is still room to consolidate and multiple smaller-sized E&Ps that would benefit from combinations, either with another public or with a large private. There is less need or pressure to consolidate now with high commodity prices, strong cash flow generation, and rising stock prices. In this environment it will likely take longer to see consolidation play out,” he wrote.
Mella McEwen is the Oil Editor for the Midland Reporter-Telegram.