Oil and Gas Undergoing Historic Consolidation Wave

Oil and gas is undergoing a historic consolidation wave comparable to what occurred in the late 1990s and early 2000s, giving rise to the modern supermajors.

That’s what Enverus Senior Vice President Andrew Dittmar said in an Enverus Intelligence Research (EIR) release sent to Rigzone recently, which summarized fourth quarter and full-year 2023 upstream merger and acquisition activity in the United States.

In the release, EIR noted that the fourth quarter recorded a massive $144 billion in upstream M&A, which the company said is the largest quarter EIR has tracked. That pushed full-year 2023 value to more than $190 billion, also setting a record, EIR said in the release.

The company highlighted in the release that two “historic” deals drove the “surge in value” - ExxonMobil’s $65 billion acquisition of Pioneer Natural Resources and Chevron’s purchase of Hess for $60 billion.

“After a decade of lowered investment in exploration and with the major U.S. shale plays largely defined, M&A has become the preferred tool to replace declining reserves and secure longevity in these companies’ profitable upstream businesses,” Dittmar said in the release.

“For the best quality resource, there are also now more buyers than sellers, driving prices upward,” he added.

Among unconventional oil resource plays in the U.S., the Permian stands well atop the heap for remaining resource, offering both the most high-quality remaining drilling opportunities and the greatest potential for resource expansion from the prolific region’s stacked resource benches, EIR stated in the release.

“It is unsurprising then that the Permian dominated M&A activity in 2023 with $103 billion transacted. That included a buy-in from Exxon as it made the Permian a cornerstone of its global portfolio with the $65 billion Pioneer purchase,” it added.

“Occidental also increased its commitment to the Permian with the purchase of private CrownRock for $12 billion in December 2023,” EIR continued.

Dittmar noted in the release that the Permian was a juggernaut for deals in 2023, “both for private sales and corporate M&A”.

“Buyers increasingly showed a willingness to pay whatever it took to boost their footprint in this critical play, and prices for future drilling inventory climbed to new highs,” he said.

“While the buyer interest is still there, we are unlikely to see an encore in 2024 because the available list of attractive takeout targets has grown short,” he added.

“At the top of that reduced target list is privately held Endeavor Energy Resources, which has an excellent chance of generating the largest transaction of 2024,” Dittmar went on to state.

With the Permian increasingly consolidated and few other U.S. plays offering the breadth of undeveloped inventory, buyers may increasingly look outside the United States for acquisition opportunities, EIR said in the release.

“Chevron struck an early move in that direction by acquiring Hess, largely for its exposure to Guyana. However, in an increasingly deglobalized world, attractive international acquisition opportunities are also more challenging,” EIR added.

“Canada stands out for U.S. companies as offering a large resource base in a developed and stable country. The Montney, which offers almost twenty years of high-quality drilling inventory at current development rates, will likely get some close looks from U.S. companies concerned about the scale and quality of inventory left to buy at home,” EIR went on to state.

In the release, EIR projected that 2024 may return to a higher flow of smaller, asset sized transactions across a wider distribution of plays.

“Bigtime corporate M&A naturally leads to portfolio pruning, with Occidental as one example by announcing it was planning to shed $4.5-6 billion of assets, mostly from its domestic portfolio,” Dittmar said.

“That should be a welcome development for some of the smaller public E&Ps plus private capital that has been priced out or lacked the scale to compete in the strategic core Permian deals,” he added.

“Among the plays likely to see an uptick in 2024 deals are the SCOOP/STACK in Oklahoma, Eagle Ford in Texas, and North Dakota’s Bakken. These plays had just a combined $11 billion of deals in 2023,” he said.

EIR noted in the release that private capital is still being raised and deployed, albeit at a slower pace than previous cycles, and noted that it would likely be interested in these non-core assets if the price was right.

“There have been about 20 new commitments announced by private equity firms in the last two years, excluding groups investing in minerals and royalties,” EIR stated.

“However, the game has changed for these firms. Rather than buying promising exploratory acreage and hoping to prove it up before selling to a public operator, the firms will likely be looking to buy relatively developed assets cheaply and generate dividends for their private investors,” EIR added.

The company also stated in the release that, in 2023, upstream M&A was overwhelmingly focused on oil, “with $186 billion in deals targeting crude compared to just $6 billion in gas-centric acquisitions”.

In a release sent to Rigzone back in October 2023, EIR noted that, in the third quarter of that year, U.S. upstream M&A “cruised along with $14 billion transacted in 25 deals”.

“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 that 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,” it added.

In that release, 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. 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.

In another release back in January 2023, EIR revealed that, in 2022, U.S. upstream M&A saw $58 billion transacted in 160 deals, including $13 billion from 26 deals in the fourth quarter.

“While deal values are down just about 20 percent from pre-pandemic averages, the volume of deals has collapsed to a nearly two-decade low as activity has been driven by large companies targeting the highest quality assets in billion-dollar-plus deals,” EIR stated in that release.

“Large-cap public companies like Devon Energy, Diamondback Energy, and Marathon Oil dominated deal activity in the back half of 2022,” Dittmar noted in the release.

“These buyers have the balance sheet strength and favorable stock valuations to take advantage of large, high-quality offerings from private sellers. Critically, they can strike deals that both accretive to current cash flow and extend their runway of drilling locations,” he added.

“For smaller companies, which are still having their equity value discounted, it is challenging to thread the needle of buying assets at accretive multiples and being able to pay for inventory,” he continued.

To contact the author, email andreas.exarheas@rigzone.com