Upstream M&A Tops $16B In 3Q22

Despite volatility and a lack of Permian transactions, diverse dealmaking from California to West Virginia yields the best quarter of 2022

Enverus Intelligence Research (EIR), a subsidiary of Enverus, the most trusted energy-dedicated SaaS platform, is releasing its summary of 3Q22 upstream merger and acquisition (M&A) activity. Upstream deals in the U.S. reached more than $16B in transacted value during the quarter for the best showing of 2022. That was achieved despite volatility in oil and gas prices, E&P stocks still missing market recognition and a surprising dearth of deals in the usually prolific Permian.

“While the business environment for E&Ps has been mostly great in 2022, that hasn’t translated to a bonanza of dealmaking,” said Andrew Dittmar, director at Enverus Intelligence Research. “Companies are using the cash generated by high commodity prices to pay down debt and reward shareholders rather than seeking out acquisitions. And when companies do make offers on assets, the bids are often disappointing to potential sellers. To reach $16B of M&A value in 3Q22 required not only a couple more typical operated shale deals, but also transactions like a public mineral company merger and the largest California deal in decades.”

Leading the way as the largest transaction of 3Q22 was EQT’s $5.2B purchase of West Virginia producer Tug Hill and associated XcL Midstream, both backed by Quantum Energy Partners. While the deal saw most of its value ascribed to existing production and midstream assets, it also included around 300 untapped drilling locations targeting the Marcellus and Utica.

In the Eagle Ford, Devon Energy also took the tack of buying an asset mostly for the value of its current production while adding incremental inventory. Its $1.8B purchase of Pontem Energy Capital’s Validus Energy was the largest in the play since 2018 and, along with the Tug Hill deal above, yet another example of a private equity company finding an exit. Both EQT and Devon purchased production-centric deals delivering free cash flow yields of around 30%, making the transactions immediately accretive to their distribution programs.

“Investors still seem skeptical of public company M&A and are holding management to high standards on deals,” added Dittmar. “Investors want acquisitions priced favorably relative to a buyer’s stock on key return metrics like free cash flow yield to give an immediate uplift to dividends and share buybacks. Given how cheaply public E&Ps are trading, it can be a tall order to strike deals that are even more favorably valued than a buyer’s stock. That also limits how much money a buyer can pay for undeveloped locations that may not generate a return until drilled years later.”

The challenge of paying for locations without upsetting investors, plus difficulties coming to an agreement on what those locations are worth, is why deals struggled in the inventory-rich Permian. The usual workhorse of upstream M&A saw less than 10% of total deal value directed its way in transactions focused only on that basin, and the largest deal in the region was for a production-heavy Central Basin Platform asset with vertical drilling opportunities.

A major contributor to the $16B of Q3 M&A was even further from the usual flow of upstream deals in one of the most mature and regulatory challenging oil regions of the country. Aera Energy, a joint venture between Shell and Exxon in California, was sold to Germany-based IKAV for nearly $4B, ending those companies’ historic involvement in the state’s petroleum business.

Rounding out activity for the third quarter was the first merger between public mineral and royalty companies. The nearly $2B acquisition of Brigham Minerals by Sitio Royalties unites two companies with similar market positioning, outlooks and valuations that were positioned to be rivals. “These two companies were poised to go head-to-head for the best M&A opportunities driving up prices,” noted Dittmar. “Instead, they will now have the power of a larger platform in the competitive minerals space.”

Going forward, challenges remain in the market including negative investor sentiment, growing recessionary risks, and concerns about cost inflation. Additionally, the less common M&A deals like California transactions or mineral mergers may not necessarily be repeated. But Permian M&A likely won’t stay down for long given how important that basin is to the overall industry and U.S. supply. Just a couple weeks into Q4, the Permian logjam has already been broken by Diamondback Energy’s $1.6B purchase of Firebird Energy. That could very well set off a chain reaction of Permian deals waiting in the wings.

“There are some reasons to be positive on upstream M&A though,” concluded Dittmar. “Despite rising costs, E&Ps are still generating a lot of cash and some companies may decide to direct portions of that toward M&A. Additionally, OPEC looks willing to reinsert itself into oil markets, which could bring stability and help buyers and sellers come together on pricing. Most helpful though would be for E&P equities to gain ground with investors. That would give management more breathing room to negotiate with private sellers on price, particularly for future inventory. Unfortunately, that may still take some time.”

Members of the media can contact Jon Haubert to request a media version of the report or to schedule an interview with one of Enverus’ expert analysts.

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About Enverus Intelligence Research
Enverus Intelligence Research, Inc. is a subsidiary of Enverus and publishes energy-sector research that focuses on the oil and natural gas industries and broader energy topics including publicly traded and privately held oil, gas, midstream and other energy industry companies, basin studies (including characteristics, activity, infrastructure, etc.), commodity pricing forecasts, global macroeconomics and geopolitical matters. Enverus Intelligence Research, Inc. is registered with the U.S. Securities and Exchange Commission as an investment adviser.