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

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

The last two energy crises that have threatened hundreds of energy companies with bankruptcy have rewritten the playbook of oil and gas mergers and acquisitions. Previously, oil and gas companies made many aggressive tactical or cyclical acquisitions following a price crash after many distressed assets became available on the cheap. However, the 2020 oil price crash that sent oil prices into negative territory saw energy companies take a more restrained, strategic and environmentally focused approach to closing M&A deals.

According to data from energy intelligence firm Enverus, cited by Reuters, U.S. oil and gas deals contracted 65% year-on-year to $12 billion in the second quarter, a far cry from 34.8 billion from the corresponding period last year, as high volatility in commodity prices left buyers and sellers clashing over the value of assets.

But deals in the U.S. oil sector are slowly starting to recover, with Enverus noting mergers and acquisitions accelerated to $16 billion in the third quarter, the most this year.

In its quarterly report, Enverus notes that Q3 was the busiest quarter in the oil and gas sector so far this year. Still, the value of deals in the first nine months totaled just $36 billion, significantly lower than the $56 billion recorded during the same period last year.

Companies are using the cash generated by high commodity prices to pay down debt and reward shareholders rather than seek acquisitions. Investors still seem skeptical of mergers and acquisitions of public companies and hold management to high standards when it comes to dealings. Investors want acquisitions to price favorably against a buyer’s stock on key performance metrics like free cash flow yield to yield an immediate boost in dividends and share buybacks“, Andrew Dittmar, director of Enverus, told Reuters.

Third Quarter M&A Transactions

According to Enverus, the biggest M&A deal in the last quarter was EQT Corp.‘s (NYSE: EQT) $5.2 Billion Natural Gas Producer Purchase THQ Appalaches I LLC together with the associated pipeline assets of Intermediate XcL. THQ Appalachia, which is owned by a private gas producer Tug Hill Operation.

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EQT said the acquired assets include approximately 90,000 base net acres offsetting its existing head lease in West Virginia, producing 800 million cfe/day and expected to generate free cash flow at average natural gas prices above approximately $1.35/MMBtu over the next five years. The company also doubled its buyback program to $2 billion and said it was increasing its 2023 year-end debt reduction target to $4 billion from $2.5 billion.

Last year, EQT unveiled a plan centered on producing more liquefied natural gas by dramatically increasing natural gas drilling in Appalachia and around the country’s shale basins, as well as pipeline and terminal capacity. export, which she said would not only bolster U.S. energy security, but also help break the world’s dependence on coal and countries like Russia and Iran. Its latest acquisition will therefore help the company achieve its goal. EQT’s shares have nearly doubled since the start of the year.

The second largest deal of the last quarter was a $4 billion deal from German asset manager IKAV for Aera Energya California oil joint venture between SA shell (NYSE: SHEL) and Exxon Mobil (NYSE:XOM). Operating primarily in the San Joaquin Valley of central California, Aera is one of California’s largest oil producers, with 125,000 barrels/day of oil and 32 million cubic feet/day of gas natural, generating around $1 billion in cash a year. A year ago, Reuters reported that Shell wanted to leave the company, and Exxon later joined the effort, assisted by a financial adviser JPMorgan Chase.

In September, the oil and gas, mining and royalty company Sitio Royalties Corp.. (NYSE: STR) is merged with Brigham Minerals (NYSE: MNRL) in an all-stock deal with an aggregate enterprise value of approximately $4.8 billion, creating one of the largest publicly traded mining and royalty companies in the United States.

Like the rest of the industry, Sitio and Brigham have seen their sales and earnings grow at a healthy pace due to rising oil prices. The merger of the two companies will allow the new entity to achieve significant economies of scale and become a leader in the mining rights sector.

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 net royalty acres, 50.3 net line-of-sight wells operated by a diverse set of well-capitalized E&P companies and second quarter pro forma net production of 32.8,000 boe / day. The deal is also expected to yield $15 million in annual operating cash cost synergies.

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

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

Eagle Ford in a nutshell

The Eagle Ford has been the hardest hit region in the US shale play and has lagged behind other regions as production continues to ramp up. But as an energy analysis company RBN Energy noted, mergers and acquisitions and drilling have recently increased in the shale play.

Namely, two weeks ago, Marathon oil (NYSE: MRO) announced that it has entered into a definitive agreement to acquire the assets of Eagle Ford from Natural Resources sign for $3 billion. Marathon says 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 cash flow of available cash, immediately improving distributions to shareholders.

End of September, Devon Energy (NYSE: DVN) has completed the $1.8 billion acquisition of privateer producer Eagle Ford Valid energy. According to Devon, this acquisition secured a premier acreage position of 42,000 net acres (90% working interest) adjacent to Devon’s existing lease in the basin. Current production from the acquired assets is approximately 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 increase natural gas production from its Dorado gas play at Eagle Ford. EOG has estimated that its Dorado assets hold approximately 21 trillion cubic feet (Tcf) of gas at breakeven cost below $1.25/MMBtu.

Drilling activity is also up in the Eagle Ford, with the region now home to 71 rigs compared to just 20 a year ago.

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

While RBN Energy touts the Eagle Ford’s ongoing resurgence, the big picture reveals that the rebound is far from established and has yet to match the strong acceleration of the 2012-2015 period. . This applies to the entire US Shale Patch, as oil executives limit expansion and prefer to return excess cash to shareholders.

Source: US Energy Information Agency (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 for 2022 and 2023. The new projections drew mixed reactions across the board, with Bloomberg stating, “The projection suggests the pace of growth for U.S. shale, one of the few sources of major new supplies over the past year, is slowing despite oil prices hovering around $90 a barrel, around double equilibrium costs of most domestic producers. If the trend continues, it would rob the global market of additional barrels to help offset OPEC+ production cuts and the disruption of Russian supplies amid its invasion of Ukraine..”

Recently, Norwegian energy intelligence company Rystad Energy revealed that only 44 oil and gas lease rounds will take place worldwide this year, the fewest since the year 2000 and a far cry from the record 105 rounds in 2019. According to the Norwegian energy analyst, only two new blocks had been authorized for drilling in the United States by the end of August this year, without any new offers of oil and gas leases from the Biden administration itself. same. Indeed, the handful of auctions that took place under Biden or bled into his presidency were decided under President Donald Trump. Meanwhile, Rystad revealed that Brazil, Norway and India are the world leaders in terms of new licenses.

We can therefore assume that a rebound in M&A, as well as drilling activity, will 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 Oilprice.com

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