Cash-rich US oil producers hunt for deals after long M&A dry spell

US oil producers flush with money after a yr of bumper income are attempting to find offers as issues develop that the shale patch’s greatest drilling websites have gotten extra scarce, priming the sector for a wave of consolidation.

Bankers and legal professionals have reported a pointy uptick in exercise in current weeks as patrons and sellers throughout the sector mobilise groups for a barrage of dealmaking after a prolonged dry spell — particularly within the sprawling Permian Basin of Texas and New Mexico, the world’s most prolific oilfield.

“You’re going to have a raft of M&A in 2023,” stated Pete Bowden, world head of vitality banking at Jefferies and one of many business’s go-to dealmakers.

“They’re on the market searching for extra stock. And we’re again within the enterprise of promoting Permian companies with prime places to stylish events at actual valuations.” 

The anticipated M&A growth is the newest signal of the strong well being of the US oil and gas business, which has reaped file income from excessive vitality costs fuelled by Russia’s invasion of Ukraine.

US shale producers final yr generated a file of greater than $150bn in free money stream, a intently watched metric within the sector, and are anticipated to rake in one other $120bn in 2023, based on Rystad Power, a consultancy. Oil teams have paid down tens of billions of {dollars} in debt over the previous yr and have ample firepower for dealmaking, bankers stated.

Driving the anticipated offers growth are fears amongst many producers that they’re operating out of prime acreage, because the yields from new wells slide after a decade of frenzied drilling.

The sector stays extremely fragmented, with dozens of operators from one-rig personal drillers to supermajors carving up the most important shale fields. Firms wish to snap up rivals with the very best remaining drilling prospects.

“In case you can go purchase assets at an inexpensive worth and you’ve got the stability sheet and the money to do it, you’ll go do it at these costs,” stated Muhammad Laghari, senior managing director of funding banking at Guggenheim Companions.

The anticipated uptick follows simply 13 offers in 2022, based on consultancy Enverus, the bottom determine since 2005. At $58bn, the whole worth was 13 per cent decrease than the earlier yr and a fifth lower than pre-pandemic ranges, as wild swings in oil and pure fuel costs made offers tough to drag off.

There have been a handful of huge ticket offers struck late final yr. Diamondback and Marathon Oil shelled out $3bn apiece to amass land within the Permian and Eagle Ford basins. One other roughly $5bn price of offers was performed throughout the sector in January, together with Matador Assets’ buy of personal equity-backed Permian driller Advance Power for $1.6bn, which bankers stated was a sign of the market heating up.

Vitol, the world’s greatest unbiased oil dealer, beat out a number of huge names final month to amass privately held Delaware Basin Assets.

It’s not simply patrons who’re desirous to strike offers. Urge for food amongst sellers can also be intensifying, each amongst private and non-private gamers. Personal fairness teams have launched fundraising rounds whereas seeking to exit earlier investments at excessive costs.

“We count on beginning second quarter and past, to see actually extra of that exercise, notably with personal fairness, as we’re listening to — and seeing — that the fundraising home windows for vitality personal fairness appear to be opening up,” stated Preston Bernhisel, an M&A associate at legislation agency Baker Botts.

Bankers stated smaller publicly listed oil and fuel producers, particularly these with market values of lower than $10bn, are weak as they wrestle to entry debt and fairness markets, whereas rising rates of interest improve borrowing prices.

“We see an increasing number of small-to mid-cap firms having restricted choices to amass or promote, so mergers with one another could also be the very best resolution to extend scale and relevance,’” stated Laghari.

With oil costs stabilising at about $80 a barrel and the business typically bullish on costs, firms are extra aligned on value expectations than they had been final yr, narrowing bid-ask spreads.

“There’s a great match with the wants of patrons and the wants of sellers proper now. You simply want a bit co-operation on value to get the offers performed,” stated Andrew Dittmar, an analyst at Enverus.

The offers bonanza is more likely to be confined to grease, stated bankers. Pure fuel costs have fallen sharply from 2022 highs of about $10 per million British thermal items to commerce about $2.50/mn BTU, leaving producers with much less urge for food to promote at what they see as depressed costs.

Fuel producers are additionally beneath rising scrutiny from competitors regulators after a spate of consolidation amongst operators within the prolific Appalachian shale fuel basins. Consumers are ready to see the end result of a Federal Commerce Fee assessment of a deliberate $5.2bn buyout by EQT, the nation’s greatest producer, of THQ Appalachia.

However in oil at the least, bankers, legal professionals and traders stated it’s a case of if, not when, a dealmaking flurry kicks off in earnest.

“I don’t know what that preliminary precursor goes to be — what the bellwether goes to be — that can say: OK, the door is opening,” stated Buddy Clark, a associate at Dallas-based legislation agency Haynes and Boone. “However as soon as it opens — you’ve seen it when you’ve seen it 100 instances — it’ll are available in with a flood.”