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In the third quarter, U.S. upstream mergers and acquisitions cruised along with $14 billion transacted in 25 deals.
That’s what Enverus Intelligence Research (EIR), a subsidiary of Enverus, noted in a release sent to Rigzone recently, which summarized the latest quarter’s upstream merger and acquisition activity in the country.
“A liftoff in corporate consolidation picked up the slack of declining opportunities to buy private assets with two-thirds of deal value last quarter coming from combinations between public companies,” EIR said in the release.
“That accelerated to historic levels in October with ExxonMobil’s $65 billion acquisition of Pioneer Natural Resources in the third-largest upstream deal ever by enterprise value, and Chevron purchasing Hess for $60 billion,” EIR added.
In the release EIR Senior Vice President Andrew Dittmar said, “as anticipated, the pace of consolidation slowed for private E&Ps as the cream of the crop in terms of scale and quality has largely, but not entirely, been bought out”.
The next logical step in consolidation is more tie-ups between public producers, Dittmar noted in the release.
“That could have slowly built toward a historic deal like ExxonMobil’s purchase of Pioneer but instead that happened right out of the gate and could well be the largest deal of the shale era,” he added.
Prior to its expansion in the Permian with the purchase of Pioneer, ExxonMobil placed a smaller bet on carbon capture utilization and storage during 3Q23 with its acquisition of Denbury for $4.9 billion, EIR stated in the release.
“While Denbury did bring to the table legacy oil production, the core driver of the acquisition is likely the infrastructure the company has in place, specifically CO2 pipelines that support ExxonMobil’s plan to build a carbon sequestration hub along the Texas-Louisiana Gulf Coast,” EIR added.
“ExxonMobil is committing to its traditional energy business, which has become extremely profitable for the major, while working to decarbonize operations to meet its emissions targets,” Dittmar stated in the release.
“This is coming from a combination of reducing upstream emissions and building its carbon sequestration business,” he noted.
By acquiring Pioneer, ExxonMobil is not only expanding its Permian portfolio, but also speeding up the Permian’s transition to a low-carbon future, John Gutentag, Product Owner at Enverus, said in the release.
“ExxonMobil has set an ambitious goal of achieving net-zero emissions by 2030 for its existing Permian assets and by 2035 for the newly acquired Pioneer asset, which is 15 years ahead of Pioneer’s original plan,” Gutentag added.
While emission intensity matters as companies set their net zero goals, it doesn’t appear to be playing a major role in how they screen targets for acquisitions, EIR noted in the release.
“Despite seeing more airtime of the environmental, social, and governance justification of deals, we have seen no clear evidence of the U.S. upstream market valuing assets based on their emission intensity,” Gutentag added.
“However, the new emissions reporting rules proposed by the Environmental Protection Agency (EPA), the methane fee introduced in the Inflation Reduction Act, and the EPA’s regulatory agenda are influencing the asset selection process, as some assets will experience disproportionately high fees and retrofitting costs while others will be minimally affected,” he continued.
EIR also stated in the release that emissions intensity didn’t deter Chevron in October’s other historic deal – the $60 billion purchase of Hess.
“Hess’ Bakken operations screen near the highest emissions intensity among public Bakken operators at just under 20 kg CO2e/boe,” EIR added.
“However, Chevron, like Exxon, will look to rapidly improve those metrics. From the standpoint of overall emission from oil and gas operations, acquisitions by majors are very bullish for the industry improving its environmental footprint,” the company stated.
The moves by ExxonMobil and Chevron are likely to ignite further consolidation among smaller oil and gas companies as they scramble to remain competitive and secure remaining drilling opportunities, EIR noted in the release.
“Already, reports have emerged of merger talks between large-cap independents including a potential combination between oil producers Devon Energy and Marathon Oil and gas-focused producers Chesapeake Energy and Southwestern Energy,” the company added.
“The large independents are also likely to go on shopping spree targeting smaller and midsize producers,” EIR continued.
“The stocks of these smaller companies almost all trade at meaningful discounts to the larger E&Ps, raising the opportunity for deals that create value for both buyers and sellers,” EIR said.
Dittmar highlighted in the release that, within U.S. shale, the most attractive acquisition targets are going to be companies with exposure to the Permian Basin.
“The Permian is uniquely positioned among U.S. shale plays as having both the most remaining high-quality inventory and the greatest opportunity for resource expansion,” he said.
“That expansion will keep shale production humming into the 2030s, albeit at a higher cost of supply. The outlook for shale is bright from here and M&A will be robust as companies want to secure their piece of that future,” he added.
In a separate release sent to Rigzone back in July, EIR noted that, in the second quarter, U.S. upstream M&A boomed with $24 billion transacted in 20 deals, “with the Permian returning to its usual position as the center of M&A activity”.
“One notable exception to this Permian-centric quarter was Chevron’s purchase of primarily DJ-focused producer PDC Energy for $7.6 billion, though PDC also has a footprint in the Delaware Basin,” EIR said in that release.
“That deal helped drive a remarkable $1.2 billion average size for deals with a disclosed value in Q2, more than double the average Q1 deal,” EIR added.
In that release, Dittmar said “the second quarter saw a thunderous return to Permian M&A after a relatively quiet start to the year”.
“The need for public buyers to secure quality drilling inventory has been brewing, and the pressure to make a deal has been mounting as the remaining opportunities are narrowed with each successive transaction. That in turn is driving higher valuations on the remaining assets,” he added.
In another release sent to Rigzone in May, EIR revealed that, in the first quarter, U.S. upstream M&A saw $8.6 billion transacted in 16 deals, “with more than $5 billion in the Eagle Ford for a surprising resurgence in that mature play”.
“While deal value is down about 20 percent versus the first quarter average since 2016, deal volume also continued its multi-year collapse with a disclosed volume of 80 percent less than the Q1 average,” EIR stated in that release.
“That resulted in an average deal size of more than $500 million,” EIR added.
In a release sent to Rigzone in October last year, EIR revealed that upstream deals in the U.S. reached more than $16 billion in transacted value during the third quarter of 2022.
“That was achieved despite volatility in oil and gas prices, E&P stocks still missing market recognition and a surprising dearth of deals in the usually prolific Permian,” EIR stated in that release.
“While the business environment for E&Ps has been mostly great in 2022, that hasn’t translated to a bonanza of dealmaking,” Dittmar said in the October 2022 release.
“Companies are using the cash generated by high commodity prices to pay down debt and reward shareholders rather than seeking out acquisitions,” he added.
“And when companies do make offers on assets, the bids are often disappointing to potential sellers. To reach $16 billion of M&A value in 3Q22 required not only a couple more typical operated shale deals, but also transactions like a public mineral company merger and the largest California deal in decades,” Dittmar went on to state.
To contact the author, email andreas.exarheas@rigzone.com
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