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

US oil producers flush with cash after a year of bumper profits are hunting for deals as concerns grow that the shale patch’s best drilling sites are becoming more scarce, priming the sector for a wave of consolidation.

Bankers and lawyers have reported a sharp uptick in activity in recent weeks as buyers and sellers across the sector mobilise teams for a barrage of dealmaking after a lengthy dry spell — especially in 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,” said Pete Bowden, global head of energy banking at Jefferies and one of the industry’s go-to dealmakers.

“They’re out there shopping for more inventory. And we’re back in the business of selling Permian businesses with prime locations to sophisticated parties at real valuations.” 

The expected M&A boom is the latest sign of the robust health of the US oil and gas industry, which has reaped record profits from high energy prices fuelled by Russia’s invasion of Ukraine.

US shale producers last year generated a record of more than $150bn in free cash flow, a closely watched metric in the sector, and are expected to rake in another $120bn in 2023, according to Rystad Energy, a consultancy. Oil groups have paid down tens of billions of dollars in debt over the past year and have ample firepower for dealmaking, bankers said.

Driving the anticipated deals boom are fears among many producers that they are running out of prime acreage, as the yields from new wells slide after a decade of frenzied drilling.

The sector remains highly fragmented, with dozens of operators from one-rig private drillers to supermajors carving up the biggest shale fields. Companies are looking to snap up rivals with the best remaining drilling prospects.

“If you can go buy resources at a reasonable value and you have the balance sheet and the cash to do it, you will go do it at these prices,” said Muhammad Laghari, senior managing director of investment banking at Guggenheim Partners.

The anticipated uptick follows just 13 deals in 2022, according to consultancy Enverus, the lowest figure since 2005. At $58bn, the total value was 13 per cent lower than the previous year and a fifth less than pre-pandemic levels, as wild swings in oil and natural gas prices made deals difficult to pull off.

There were a handful of big ticket deals struck late last year. Diamondback and Marathon Oil shelled out $3bn apiece to acquire land in the Permian and Eagle Ford basins. Another roughly $5bn worth of deals was done across the sector in January, including Matador Resources’ purchase of private equity-backed Permian driller Advance Energy for $1.6bn, which bankers said was an indication of the market heating up.

Vitol, the world’s biggest independent oil trader, beat out a host of big names last month to acquire privately held Delaware Basin Resources.

It is not just buyers who are eager to strike deals. Appetite among sellers is also intensifying, both among public and private players. Private equity groups have launched fundraising rounds while looking to exit previous investments at high prices.

“We expect starting second quarter and beyond, to see certainly more of that activity, particularly with private equity, as we are hearing — and seeing — that the fundraising windows for energy private equity seem to be opening up,” said Preston Bernhisel, an M&A partner at law firm Baker Botts.

Bankers said smaller publicly listed oil and gas producers, especially those with market values of less than $10bn, are vulnerable as they struggle to access debt and equity markets, while rising interest rates increase borrowing costs.

“We see more and more small-to mid-cap companies having limited options to acquire or sell, so mergers with each other may be the best solution to increase scale and relevance,’” said Laghari.

With oil prices stabilising at about $80 a barrel and the industry generally bullish on prices, companies are more aligned on price expectations than they were last year, narrowing bid-ask spreads.

“There’s a good match with the needs of buyers and the needs of sellers right now. You just need a little co-operation on price to get the deals done,” said Andrew Dittmar, an analyst at Enverus.

The deals bonanza is likely to be confined to oil, said bankers. Natural gas prices have fallen sharply from 2022 highs of about $10 per million British thermal units to trade about $2.50/mn BTU, leaving producers with less appetite to sell at what they see as depressed prices.

Gas producers are also under increasing scrutiny from competition regulators after a spate of consolidation among operators in the prolific Appalachian shale gas basins. Buyers are waiting to see the outcome of a Federal Trade Commission review of a planned $5.2bn buyout by EQT, the country’s biggest producer, of THQ Appalachia.

But in oil at least, bankers, lawyers and investors said it is a case of if, not when, a dealmaking flurry kicks off in earnest.

“I don’t know what that initial precursor is going to be — what the bellwether is going to be — that will say: OK, the door is opening,” said Buddy Clark, a partner at Dallas-based law firm Haynes and Boone. “But once it opens — you’ve seen it once you’ve seen it 100 times — it’ll come in with a flood.”