Expect a boom in upstream oil and gas mergers and acquisitions activity in the coming months.
More than $50 billion in deals are now in play in the upstream sector in the United States alone, according to Drillinginfo, a research and data analytics firm based in Austin, Texas.
Worldwide, Drillinginfo has identified $165 billion in potential energy-related transactions across all industry segments. That signals a high level of asset sales in the near future.
In part, the M&A outlook in the U.S. reflects a shift by the oil and gas industry toward a more concentrated geographic focus. This creates a certain amount of risk, as some companies become single-basin, pure-play operators instead of spreading their bets across multiple areas.
While companies may be selling off unwanted properties, what’s coming into the market now isn’t junk. Plenty of attractive assets are up for grabs.
“The interesting thing about today’s market is the quality of these asset packages being shed by high-quality operators,” said Brian Lidsky, senior director for Drillinginfo in Houston.
As an example, the company cited highly desirable assets in the Permian, Eagle Ford, Haynesville and Fayetteville unconventional plays already put up for sale by BHP, which is narrowing its focus to global deepwater.
“Those are all high-quality, significant assets which would fit very well into a portfolio like BP, who’s been rumored to be buying the package, or could fit well into an independent E&P company,” Lidsky said.
Upcoming property offers could include billion-dollar packages in the Bakken, Marcellus, Eagle Ford, Niobrara, Haynesville and Fayetteville, he said.
“It is certainly not a Permian (Basin) dominated set of assets out there for sale,” Lidsky noted.
Who Are the Buyers?
On the buying side, investment money appears to be coming from a variety of sources, including major companies looking to enhance their portfolios, overseas investors hoping to secure future hydrocarbon supplies and well-funded private equity groups.
“We expect buyers to run the gamut from private equity, where since 2017, over 70 teams have been provided with more than $15 billion of committed capital, to the majors, and to Asian, European and Middle Eastern players,” he said.
Lidsky described the private equity groups as being under pressure to spend accumulated investment dollars.
“Private equity traditionally has looked to deploy their capital at early stages of resource plays, or maybe with knowledge to buy land that might be part of the core of a play,” he said.
Publicly-traded independents that have mastered unconventional resource technology or that have extensive knowledge of a play also are potential buyers, if they get Wall Street’s backing, explained Lidsky.
“It is not unforeseeable that Wall Street would support some of these ‘masters of the technology’ to go out and acquire some of these quality assets,” he said.
And overseas companies with investment money continue to eye large asset sales as a way to enter – and establish themselves in – U.S. unconventional resource plays.
“Particularly on the gas side, there is some strong interest out of Asia,” where companies and countries see a share of future U.S. natural gas production as
“a natural hedge against their LNG demands,” Lidsky said.
In the U.S., the Utica, Bakken, Eagle Ford and Delaware basin unconventional plays together could account for more than half of the upcoming M&A activity, Drillinginfo projected.
It expects about one-third of the total U.S. sales to be in conventional resource plays, the rest in unconventionals.
M&A prospects also look promising in the oil and gas midstream and downstream segments, Drillinginfo said. And it called the rapidly evolving market for royalties and minerals “very strong.”
The industry is already seeing some $1 billion-plus deals. In a single transaction in July, Total closed on the acquisition of Engie’s global portfolio of LNG assets for an overall enterprise value of $1.5 billion. Additional payments of up to $550 million could be made by Total if oil markets continue to improve in coming years.
Large U.S. independents typically spread their interests over multiple resource play areas as unconventionals developed, Lidsky observed.
“What we are seeing in the marketplace is that companies historically have had portfolios that covered two, three, four separate major resource plays,” he noted.
Especially among publicly traded E&P companies, he said, the focus now has shifted from reserve growth to a mandate of production growth and cash-flow growth. Some of those companies are reviewing their property holdings and finding decades of non-core prospects to divest.
“For instance, QEP is selling off a very high-quality Bakken package as QEP turns to becoming a pure-play Permian Basin player,” Lidsky said.
Upstream trends affecting the U.S. industry today include increased emphasis on production optimization and full-field development, and a tighter focus on core competencies and core operational areas.
“Overall what we’re seeing is a little bit of a shift in the U.S., particularly among the independents. A lot of our independents are shifting to focus on a single basin to get to efficiency and positive cash flow,” Lidsky said.
“That also comes with single-basin concentration risk,” he added.
Early Bakken players faced single-basin risk with inadequate oil pipeline capacity, limited availability of development infrastructure and equipment, a shortage of experienced local manpower, and not enough available housing when workers could be attracted to the area.
Today, Permian Basin players are seeing the effects of singe-basin risk as the basin’s oil production has swelled toward takeaway capacity.
New pipeline construction is planned to move Permian Basin oil, but transportation bottlenecks could lead to additional crude-price discounting before relief arrives. The basin “has reached a level today where pipelines are at capacity,” Lidsky said.
Oil prices have an effect on the level of upstream M&A activity, Lidsky noted, and the crude-price rebound over the past 12 months has already strengthened the outlook for asset sales.
“One positive is, the consensus is that the risk of oil prices crashing below $50 is over,” he said.
At the same time, companies are finding lots of surplus upstream assets to put up for sale.
“The market now probably is best characterized as: It’s a buyers market,” Lidsky said.