Energize Weekly, January 20, 2021
After being hobbled by an economy and commodity prices weakened by the novel coronavirus pandemic, merger activity among oil and gas production companies rebounded in the second half of 2020, according to Enverus, an industry analytics firm.
Total activity for 2020 was $52 billion, powered by $27 billion in activity in the fourth quarter – the best final quarter in the last three years. That followed $21 billion in activity in the third quarter.
Compared to 2019, there was a 45 percent drop in mergers and acquisitions (M&A) on a dollar basis in 2020. The number of deals, the so-called deal flow, was at a historic low, equal to a third of the 10-year average.
There were about 140 deals in total, the lowest since at least 2006 “as companies largely avoided asset acquisition to preserve cash,” the Enverus study said.
“The dollar number is down from 2019, but it is still a respectable number,” Andrew Dittmar, an Enverus analyst, said in an interview. “But the deal flow was way down. There were sporadic, larger corporate deals, but the bread-and-butter assets deals were absent.”
In the first half of the year, uncertainty about the pandemic and weak oil and gas prices, which reached historic lows, dampened activity, Dittmar said.
By the fourth quarter, however, commodity prices had firmed, and a handful of companies moved to obtain quality assets or to improve performance and reduce costs through acquisitions.
A few big deals were responsible for the bulk of the dollar value in 2020.
In the fourth quarter, ConocoPhillips purchased Concho Resources for $13.3 billion, Pioneer Natural Resources acquired Parsley Energy for $7.6 billion, and Diamondback Energy paid $2.2 billion for QEP Resources.
The third quarter saw two big merger moves – Chevron’s purchase of Noble Energy for $13 billion and Devon Energy’s $5.6 billion acquisition of WPX Energy.
Almost all the activity focused on the Permian Basin, which straddles Texas and New Mexico, with 83 percent of the M&A dollar value focused on the basin.
“The COVID pandemic in 2020 and its effects on commodity prices complicated a balancing act by shale companies to return cash to their shareholders while maintaining production,” Enverus said. “One response was consolidation to drive down cost structures.”
Conoco’s purchase of Concho looks to have be aimed at adding Permian inventory, while the Pioneer-Parsley deal for Parsley “may have placed more emphasis on synergies given Pioneer’s substantial legacy inventory,” Enverus said.
Outside the Permian, Southwestern Energy bought Appalachian basin producer Montage Resources for $874 million, and two Denver-Julesburg Basin operators, Bonanza Creek and HighPoint Resources, merged in a $376 million deal.
The majority of large shale operators have been struggling to assure positive cash flow, but in the pandemic economy, even as drillers cut budgets, they were hit with a wave of red ink. Twenty-seven of the 34 shale companies analyzed by the Institute for Energy Economics and Financial Analysis in the second quarter of 2020 posted operating losses.
More than 250 oil companies filed for bankruptcy protection in 2020, including 125 in Texas, according to Haynes and Boone, a law firm that tracks the filings.
Companies looking for acquisitions are being cautious, Dittmar said, and they are looking for “top tier assets with moderate debt load and a really strong asset base and are accretive to cash flow.”
“It doesn’t have to be the Permian, but the Permian has the most companies that fit that criteria.” Dittmar said.
Internationally, M&A activity appeared to be largely unaffected. There were 15 deals in Canada and 40 internationally in the fourth quarter of 2020 compared to 20 Canadian and 32 international deals in the fourth quarter of 2019.
In general, the international deals were for smaller dollar values. The U.S. accounted for 65 percent of global M&A dollars in the fourth quarter, and in Canada, one deal – Cenovus Energy’s $7.8 billion acquisition of Husky Energy – represented 85 percent of fourth quarter deal value for the country.
