The M&A Boom may not lead to a drilling spree in US shale

The last two energy crises that threatened hundreds of energy companies with bankruptcy have rewritten the oil and gas M&A playbook. In the past, oil and gas companies made many aggressive tactical or cyclical acquisitions following a drop in prices after many distressed assets became available cheaply. However, the 2020 oil price crash that sent oil prices into negative territory has seen energy companies adopt a more restrained, strategic, and environmentally focused approach to cutting M&A deals.

According to data released by energy intelligence firm Enverus, cited by Reuters, US oil and gas dealmaking contracted 65% Y/Y to $12 billion in the second quarter, far from $34.8 billion in the corresponding period last year, due to volatility in commodity prices. the high left buyers and sellers clashing over asset value.

But dealmaking in the US oil patch is now slowly starting to recover, with Enverus noting that mergers and acquisitions raised the pace to $16 billion in the third quarter, the most this year.

In its quarterly report, Enverus said the 3rd quarter was the most active quarter in oil and gas so far this year. Still, the deal value in the first nine months only totaled $36 billion, significantly less than the $56 billion recorded in the same period last year.

The company is using cash generated by high commodity prices to pay down debt and reward shareholders rather than looking for acquisitions. Investors still seem skeptical about public company M&A and hold management to high standards in deals. Investors want acquisitions to outperform the stock they buy on key return metrics such as free cash flow generation to provide an immediate boost to dividends and stock buybacks.“Andrew Dittmar, director of Enverus, told Reuters.

Third Quarter M & A deals

According to Enverus, M & A was the biggest deal last quarter EQT Corp‘s (NYSE: EQT ) $5.2 billion purchase of natural gas producers THQ Appalachia I LLC as well as the associated pipeline assets of XcL Midstream. THQ Appalachia, which is owned by a private gas producer Tug Hill Operation.

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EQT said the acquired assets include ~90K core net acres offsetting its core leasehold in West Virginia, producing 800M cfe/day and expected to generate free cash flow at a high average natural gas price of ~$1.35/MMBtu over the next five years. The company also doubled its buyback program to $2B, and said it increased its 2023 year-end debt reduction goal to $4B from $2.5B.

Last year, EQT announced a plan centered on producing more liquid natural gas by dramatically increasing natural gas drilling in Appalachia and around the country’s shale basins, as well as pipeline capacity and export terminals, which it said would not only improve the United States’ energy security. but also help break the global reliance on coal and in countries like Russia and Iran. Thus, the latest acquisition will help the company to achieve its goals. EQT shares have nearly doubled in the year-to-date.

The second largest deal last term was the German asset manager IKAV’s $4 billion deal for Aera Energya California oil joint venture between Shell Plc (NYSE: SHEL) and Exxon Mobil (NYSE: XOM). Mainly operating in central California’s San Joaquin Valley, Aera is one of California’s largest oil producers with 125K bbl/day of oil with 32M cf/day of natural gas, generating $1B in cash annually. A year ago, Reuters reported that Shell wanted out of the business, and Exxon later joined the business, assisted by financial advisers. JPMorgan chased.

Back in September, oil and mineral gas and royalty companies Sitio Royalties Corp. (NYSE: STR) was merged with Brigham Minerals (NYSE: MNRL) in an all-stock deal with an aggregate enterprise value of ~$4.8B thus creating one of the largest publicly traded minerals and royalty companies in the United States.

Like the rest of the industry, Sitio and Brigham have seen their top and bottom lines expand at a rapid clip on the back of rising oil prices. Combining the two companies will allow the new entity to achieve significant economies of scale and become a leader in the mineral-rights industry.

The merger creates a company with free high-quality assets in the Permian Valley and oil-focused regions. The combined company will have nearly 260K net royalty acres, 50.3 net line-of-sight wells operated by a well-capitalized, diverse set of E&P companies, and pro-forma Q2 net production of 32.8K boe/day. The deal is also expected to bring in $15 million in annual operating cash cost synergies.

Sitio and Brigham shareholders receive 54% and 46% of the combined company, respectively, on a diluted basis. Sitio Royalties recently reported Q2 net income of $72M on revenue of $88M.

Other notable deals: Diamondback Energy Inc. (NASDAQ: FANG) has entered into a deal to acquire all leasehold interests and related assets FireBird energy LLC for $775 million in cash and 5.86 million Diamondback shares with a deal worth $1.6 billion.

Eagle Ford In Focus

The Eagle Ford is the hardest-hit area in the US shale patch, and has lagged behind other areas as production has continued. But as an energy analytics company RBN energy has noted, M & A and drilling lately has been surging in the shale play.

That is, two weeks ago, Marathon oil (NYSE: MRO) announced that it has entered into a definitive agreement to acquire the assets of the Eagle Ford Natural Resources Ensign for $ 3 billion. Marathon said it expects the deal to be “immediately and significantly accretive to key financial metrics,” and will result in a 17% increase in 2023 operating cash flow and a 15% increase in free cash flow, directly increasing shareholder distributions.

At the end of September, Devon Energy (NYSE: DVN ) closed on the $1.8 billion acquisition of the privately held Eagle Ford producer. Validus Energy. According to Devon, this acquisition secures a prime acreage position of 42,000 net acres (90% working interest) adjacent to Devon’s existing leasehold in the basin. Current production from the acquired assets is ~35,000 Boe per day and is expected to increase to an average of 40,000 Boe per day over the next year.

earlier, EOG Resources (NYSE: EOG) announced plans to significantly expand its natural gas production at its Dorado gas play in the Eagle Ford. EOG has estimated that its Dorado asset holds ~21 trillion cubic feet (Tcf) of gas at a breakeven cost of less than $1.25/MMBtu.

Drilling activity is also up in the Eagle Ford, and the area is now home to 71 rigs compared to only 20 a year ago.

Overall US shale drilling and fracking activity showed good signs of rebound with the current rig count of 779 a good 223 rigs higher than a year ago. But a full recovery is far from guaranteed: EOG has forecast that overall US oil output will increase between 700,000 and 800,000 barrels per day this year. However, EOG’s top executive has warned that next year’s gains will likely trend down. Natural Resources Pioneer (NYSE: PXD ) has a more bleak outlook, forecasting that U.S. production will only increase by about 500,000 barrels per day this year, one of the lowest forecasts by any analyst, and fall even further in the coming year.

While RBN Energy has been touting the resurgence happening in the Eagle Ford, looking at the bigger picture shows a rebound that is far from established and has yet to measure up to a sharp rise in the period 2012-2015. This applies throughout the US Shale Patch as oil executives limit their expansion and prefer to return excess cash to shareholders.

Source: US Energy Information Administration (EIA)

A week ago, the Energy Information Administration (EIA) released its latest Short-Term Energy Outlook (STEO) in which it revised its outlook for oil production in 2022 and 2023. The new projections have caused mixed reactions across the board, with Bloomberg saying, “Projections show the growth rate of US shale, one of the few major new sources of supply in recent years, is slowing despite oil prices hovering around $90 a barrel, about double the breakeven costs of most domestic producers. If the trend continues, it will drain the global market of additional barrels to help offset OPEC+ production cuts and disruptions to Russian supplies amid the Ukraine invasion..”

Recently, Norwegian energy intelligence firm Rystad Energy revealed that only 44 oil and gas lease rounds will be held globally this year, the fewest since 2000 and far from the record 105 rounds in 2019. According to Norwegian energy analysts, only two new blocks licensed for drilling in the US until the end of August this year with no new offers for oil and gas leases coming from the Biden administration itself. Indeed, a handful of auctions that have advanced under Biden or bled into his presidency were decided during Donald Trump’s presidency. Meanwhile, Rystad has revealed that Brazil, Norway, and India are world leaders in terms of new licenses.

Therefore, we can expect that the rebound in M&A, as well as drilling activity, may not necessarily translate into a full shale comeback, especially given the new shale playbook that limits spending, high inflation as well as the high cost of labor and equipment.

By Alex Kimani for

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