Barreling Ahead: Oil & Gas M&A Trends
Over the past three years, the oil and gas industry has undergone significant consolidation, driven mainly by major players seeking to expand their asset base and optimize their operations. This wave of mergers and acquisitions has been led by industry giants such as ExxonMobil, Chevron, Occidental Petroleum, and ConocoPhillips.
ExxonMobil’s notable deals include a $59.5 billion bid for Pioneer Natural Resources and the acquisition of Denbury Inc for $4.9 billion. Chevron has made significant moves as well, offering $53 billion for Hess Corporation and purchasing PDC Energy for $6.2 billion. Similarly, Occidental Petroleum agreed to buy CrownRock for $12 billion
Strong commodity prices in recent years have helped corporations to rebuild their balance sheets, accelerating the M&A trend. Furthermore, ongoing conflicts in the Middle East and the Russian/Ukraine War, as well as OPEC+’s extension of production cuts, suggest that commodity prices will remain stable or rise in the coming year.
Since companies expect to see stable or increased commodity prices, and with the appearance that the energy transition is further off than originally expected, experts believe we will witness continued M&A activity as companies build their inventories.
If you look at the top 20 US oil businesses in 2020, 10 of them, including the eight smallest, have been bought by larger companies in the last four years, with ExxonMobil and Chevron clearly leading in terms of dollar amount.
Record Deals in Q1
The size of U.S. oil and gas deals reached a record $51 billion during the first quarter of 2024, according to data provider Enverus. Energy companies have rushed to expand oil and gas drilling inventories, especially in the Permian Basin of West Texas and New Mexico, where producer breakeven costs are about $64 a barrel. Oil prices averaged about $77 a barrel last quarter.
“Most of the high-quality U.S. drilling prospects are in the Permian. So, it is unsurprising the prolific basin was yet again the primary driver for M&A within oil and gas,” Andrew Dittmar, Enverus Intelligence Research’s principal analyst, said.
The biggest proposed acquisition last quarter was Diamondback Energy’s $26 billion bid for closely held Endeavor Energy Partners. Apache parent APA’s $4.5 billion deal for Permian oil rival Callon Petroleum, and natural gas Chesapeake Energy’s $7.4 billion deal for Southwestern Energy rounded out the period’s most valuable deals.
The number of deals rose to 27 last quarter, compared with 20 in the same period a year ago, and 60% of first quarter transactions by value were in the Permian, Enversus noted.
“The US majors and large independents are showing confidence in sustained multi-decade demand for hydrocarbons as fuel and petrochemical feedstock, said Steve Almrud, managing member of Haven Energy Advisors, LLC and former head of Global A&D for the energy group of Barclays Capital.
“Additionally, institutional investors are requiring adherence to basic measures like earnings, return on capital, return of capital, and limited capital reinvestment.”
Access to Capital Markets
These large buyers currently have preferential access to capital markets and lenders to complete transactions, whereas small public companies face financing challenges, and private equity-backed companies have seen limited exit options (no IPOs) in recent years, explained Almrud, “driving these entities to consolidate up the food chain.”
While recent vital consolidations have raised concerns about the depth of investor interest in public energy businesses, experts believe the markets are warming up to follow-on investments.
Akin Gump Strauss Hauer & Feld LLP, a global oil & gas law firm, expects the next 12 months to be “considerably more active than the last three years,” expecting additional megadeals to potentially occur in the remainder of the year as the bigger exploration & production companies seek to keep up. The firm also expects further M&A activity in the Permian Basin.
Energy companies now account for less than 4% of the S&P 500, a decrease from 7% to 8% in the past. The only sectors not trading above their 25-year highs are energy and utilities. However, there is room for optimism, based on earnings per share and return on capital employed growth, and more M&A deals in the industry, noted Almrud.
“While Wall Street tends to have reservations about capital expenditures, production decline is natural and inevitable, reinvestment will have to occur, and the subsequent growth will be rewarded as long as the industry convinces investors that equity returns are real, repeatable, and reliable,” he said.
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