This downturn cycle of oil and gas has proven to be difficult for many operators, with many companies filing bankruptcy due to overwhelming debt and weak liquidity. However, it also has presented an opportunity for companies to acquire players in distress or merging to increase operational efficiencies and scale. Operators with strong balance sheets and a clear strategy to remain in oil and gas can indeed benefit by diversifying or expanding their portfolios through acquisitions of assets at a discount. These acquisitions are a long-term bet that commodity prices will improve in the years to come.
Most of the recent deals started happening in H2 2020, when buyers have regained confidence in conjunction to the recovery of oil prices from the year low. The list of major announced deals from Q3 2020 to date sums up to more than $37.6bn in the US and up to $2.7bn in Canada, representing a dramatic increase from less than $2bn agreed in the US in Q2 2020. Companies acquire acreage that is adjacent to or overlaps their existing position creating an opportunity to reduce costs. With additional acreage, companies can take advantage of longer laterals in their drilling operations on top of effectively utilising nearby infrastructure in place to help lower operating costs. However, a major cost reduction comes from G&A (general and administrative) savings in which redundant positions are eliminated causing job losses in oil and gas sector.
Majority of the deals involve key operators with already prominent presence in unconventional shale, looking to acquire additional acreage in neighbouring counties or to high-grade their portfolio, namely Chevron Corporation, ConocoPhillips, Pioneer Resources, Southwestern Energy and EQT Resources. The biggest deal by far is $13bn between Chevron Corp and Noble Energy. The company was mainly attracted by Noble Energy de-risked portfolio, especially in Israel where 98% of the proved reserves have been developed. This gives room for Chevron to prove its capability to improve cost efficiency and maximise return on these assets. Chevron will also be adding another new operation in DJ Basin, while strengthening its Permian portfolio, echoing the company’s interest in Anadarko in 2019. However, Chevron is cutting capital and production guidance, especially in US upstream to focus on generating short term cash flow while preserving long term value of unconventional shale.
Following Chevron’s deal are $9.7bn deal between ConocoPhillips and Concho Resources, $7.6bn deal between Pioneer and Parsley Energy, as well as a merger of equals worth $5.7bn between Devon Energy and WPX Energy. ConocoPhillips plans to integrate Concho’s operational expertise in Permian Basin to further lower breakeven oil prices, as well as to maintain flexibility in capital allocation to fill any supply gap if demand for crude oil recovers. They will be adding over 300 thousand barrels of oil equivalent (mboed) of production and a total of 800,000 net acres, with slight risk of federal land exposure. However, ConocoPhillips considered the risk into the transaction, mentioned that the overall exposure is limited, and it is confident that these resources will be required as part of future oil supply. On the other hand, Pioneer would become the largest independent producer in the Permian basin with over 550 mboed after acquiring Parsley Energy. The main driver of this acquisition is to maintain quality inventory in Permian Basin, to combine expertise and to operate at a larger scale and size to reduce cost, thus ultimately sustaining through a reduced oil price scenario. This merger between Devon Energy and WPX is to help increase the competitiveness of the pro forma company with other peers with large operating scale, driven by similar vision to focus on free-cash-flow generation while maintaining strong financial position. This deal will mainly help to create a dominant Delaware position due overlapping acreage and added cost efficiency generated from collective synergy.
In natural gas shale plays, the two biggest deals are $870m deal between Southwestern Energy and Montage Resources and $735m deal between EQT acquires Chevron’s Marcellus Assets. Southwestern Energy doubles its position in the southwest area in the Appalachia Basin with the purchase of Montage Resources, with production rising to 2.9 billion cubic feet equivalent per day (bcfed) and net acres expanding to approximately 786,000 acres. EQT benefits from Chevron’s Marcellus asset due to overlapping acreage which can help drill longer laterals and drive operation efficiencies. With the purchase of Chevron’s Marcellus position, EQT adds 335,000 net acres and 450 million cubic feet equivalent per day (mmcfed) of net production.
In Canada, the Cenovus-Husky deal of $2.9bn is one of the biggest deals that occurred since Q2 2019 and showcases Cenovus intention to capitalise on the weak market environment. Acquiring Husky hedges Cenovus’ risk exposure to Western Canadian Select (WCS) benchmark and increases the company’s refinery operations in Ohio and Wisconsin. However, Permian Basin remains as the most attractive play to most oil producers, while Appalachia basin appeals to most of the gas producers. Oil-related deals have outweighed gas-related deal due to the relatively weaker oil prices. GlobalData expects more M&A activities coming in 2021, mainly from companies that have a strong balance sheet and can expand their existing position given that commodity prices do not decline sharply.
Looking at rumoured deals, Permian Basin remains the centre of attraction for potential acquisition and divestiture, driven by the uncertainty around the outlook of crude oil prices to recover to pre-pandemic levels. Ovintiv, Double Point Energy, and EOG Resources are a few of the parties with stakes in Permian Basin looking to divest their assets. There could potentially be another huge deal as EOG Resources is allegedly reviewing potential bids from supermajors, who are willing to bet big on the recovery of oil prices, such as Exxon Mobil Corporation, Chevron and Total SE.