M&A boom may not lead to US shale drilling frenzy

The last two energy crises, which threatened hundreds of energy companies with bankruptcy, have rewritten the playbook for oil and gas M&A. Previously, oil and gas companies have made numerous aggressive tactical or cyclical buyouts after price falls after many distressed assets became cheaply available. However, the 2020 oil price plunge that sent oil prices into negative territory has prompted energy companies to take a more cautious, strategic and green approach to trimming mergers and acquisitions.

According to data from energy news outlet Enverus, cited by Reuters, the US oil and gas business shrank 65% Y/Y to $12 billion in the second quarter, a far cry from $34.8 billion in the corresponding period last year, as commodity prices wildly fluctuating caused buyers and sellers to clashed over assets.

But deals in the U.S. oilfield are now slowly beginning to rebound, with Enverus noting that mergers and acquisitions accelerated to $16 billion in the third quarter, the highest this year.

Enverus points out in its quarterly report that Q3 was the most active quarter in the oil and gas business so far this year. Still, transaction value for the first nine months was just $36 billion, down significantly from the $56 billion recorded in the same period last year.

Companies use the cash generated by high commodity prices to pay down debt and reward shareholders, rather than pursuing acquisitions. Investors still seem skeptical about mergers and acquisitions of listed companies and place high demands on the management of deals. Investors want acquisitions to be cheaply priced relative to a buyer’s shares when considering key return metrics like free cash flow yield to immediately boost dividends and share buybacks‘ Andrew Dittmar, director of Enverus, told Reuters.

M&A deals in the third quarter

According to Enverus, the largest M&A deal was in the last quarter EQT Corp‘s (NYSE: EQT) $5.2 billion acquisition of a natural gas producer THQ Appalachia I LLC and related pipeline assets of XcL midstream. THQ Appalachia, owned by a private gas producer Tug Hill in operation.

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EQT said the acquired assets include ~90,000 core net acres offsetting its existing core lease holdings in West Virginia, producing 800M cfe/day and projecting free cash flow over the next five years at average natural gas prices above ~$1.35/ MMBtu will generate. The company also doubled its buyback program to $2 billion and said it is increasing its debt reduction target to $4 billion by the end of 2023 from $2.5 billion.

Last year, EQT unveiled a plan focused on producing more liquefied natural gas by dramatically increasing natural gas drilling in the country’s Appalachian Mountains and shale basins, as well as pipeline and export terminal capacity, which will not only improve the energy security of the United States countries, but also help to break the global dependence on coal and on countries like Russia and Iran. The recent acquisition will therefore help the company achieve its goal. EQT shares have nearly doubled year-to-date.

The second-biggest deal last season was German asset manager IKAV’s $4 billion deal aera energya California oil joint venture between Shell Plc (NYSE:SHEL) and Exxon Mobile (NYSE:XOM). Operating primarily in central California’s San Joaquin Valley, Aera is one of California’s largest oil producers with 125,000 bbl/d of oil and 32 million cf/d of natural gas and generates approximately $1 billion in cash annually. A year ago, Reuters reported that Shell was looking to exit the company, and Exxon later joined the effort with the support of a financial advisor JPMorgan Chase.

Back in September, oil and gas minerals and royalty companies Site Royalties Corp. (NYSE: STR) will be merged into Brigham Minerals (NYSE: MNRL) in an all-stock deal with an aggregate enterprise value of ~$4.8 billion, 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 both their sales and earnings grow at a rapid pace due to rising oil prices. The combination of the two companies will allow the new company to achieve significant economies of scale and become a leader in the mineral rights industry.

The merger created a company with complementary high quality assets in the Permian Basin and other oil-focused regions. The combined company will have nearly 260,000 acres with net royalties, 50.3 net sighted wells operated by a well capitalized, diverse group of E&P companies and pro forma net production in Q2 of 32.8k boe/day. quarter. The transaction is also expected to yield $15 million in annual operating cost synergies.

Sitio and Brigham shareholders received 54% and 46%, respectively, of the combined company on a fully diluted basis. Sitio Royalties recently reported second quarter net income of $72 million on revenue of $88 million.

Another notable deal: Diamondback Energy Inc. (NASDAQ: FANG) has entered into an agreement to acquire all leases and related assets of FireBird Energy LLC for $775 million in cash and 5.86 million shares of Diamondback valued at $1.6 billion.

Eagle Ford in focus

The Eagle Ford was the hardest-hit region in the US shale field, lagging other regions during the ongoing production ramp-up. But as an energy analysis company RBN energy has noted that recent mergers and acquisitions and shale drilling have been on the rise.

Namely two weeks ago Marathon Oil (NYSE: MRO) announced that it has entered into a definitive agreement to acquire the assets of Eagle Ford Ensign Natural Resources for $3 billion. Marathon expects the transaction to have “immediate and significant positive impact on key financial metrics,” resulting in a 17% increase in operating cash flow through 2023 and a 15% increase in free cash flow, which will immediately boost payouts to shareholders will improve.

End of September, Devonian energy (NYSE: DVN) has completed the $1.8 billion acquisition of privately held manufacturer Eagle Ford validus energy. According to Devon, this acquisition secured a prime acreage of 42,000 acres (90% working interest) adjacent to Devon’s existing lease in the basin. Current production from the acquired assets is ~35,000 boe per day and is projected 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 facility in Eagle Ford. EOG has estimated that its Dorado assets store approximately 21 trillion cubic feet (Tcf) of gas at a breakeven cost of less than $1.25/MMBtu.

Drilling activity has also increased at Eagle Ford, with the region now home to 71 rigs compared to just 20 a year ago.

Overall, US shale drilling and fracking activity is showing good signs of recovery, with the current rig count of 779, up some 223 rigs from a year ago. But a full recovery is far from guaranteed: EOG forecasts that total US oil production will rise by 700,000 to 800,000 barrels a day this year. However, EOG’s top exec has warned that earnings are likely to trend down next year. Pioneer of natural resources (NYSE: PXD) has an even bleaker outlook, forecasting that U.S. production will rise by only about 500,000 barrels per day this year, one of the lowest forecasts by any analyst, and fall even lower in the coming year.

While RBN Energy has touted Eagle Ford’s continued resurgence, a look at the bigger picture shows that the recovery is far from established and has yet to withstand the sharp rise seen in 2012-2015. This is true across the US shale patch as oil executives scale back expansion and prefer to return excess cash to shareholders.

Source: US Energy Information Administration (EIA)

A week ago, the Energy Information Administration (EIA) published its latest Short Term Energy Outlook (STEO), in which it revised its oil production forecasts for 2022 and 2023. The new forecasts have drawn mixed reactions across the board, with Bloomberg saying: “The forecast suggests the pace of growth in U.S. shale oil, one of the few sources of major new supply last year, is slowing, although oil prices are hovering around $90 a barrel, about double the breakeven cost of most corresponds to local producers. If the trend continues, it would siphon additional barrels from the global market to offset cuts in OPEC+ production and the disruption in Russian supplies during the invasion of Ukraine.”

Recently, Norwegian energy news outlet Rystad Energy announced that only 44 oil and gas lease rounds will take place worldwide this year, the fewest since 2000 and a far cry from a record 105 rounds set in 2019. According to Norwegian energy analyst By the end of August this During the year, only two new blocks had been licensed for drilling in the US, and there were no new offers for oil and gas leases from the Biden administration itself of Donald Trump’s presidency. Meanwhile, Rystad has revealed that Brazil, Norway and India are world leaders in terms of new licenses.

We can therefore surmise that a rebound in M&A and drilling activity will not necessarily result in a full comeback for shale, especially given shale’s new playbook of spending restraint, high inflation, and high labor and equipment costs.

By Alex Kimani for Oilprice.com

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