With a pair of significant new deals having taken place in the span of a week, the mergers and acquisitions trend in the U.S. oil and gas shale sector is heating up again during the second half of 2023. The uptick in the pace of major M&A deals comes as the active rig counts by both Enverus and Baker Hughes
BHI
Baker Hughes’s latest weekly rig count, released August 18, found a week-over-week drop of 13, the third consecutive week in which the count has fallen. Since its recent peak of 878 active U.S. rigs in mid-January, the Enverus daily rig count sat at 701 as of August 21, a 20% reduction in eight months. The slowdown is undeniable, which places a premium on maximizing economies of scale to control costs as production levels stagnate. Executing mergers and acquisitions can enable a company to raise its equity production while simultaneously increasing those economies of scale.
Within a span of a week, two Texas producers – Permian Basin-based Permian Resources and Eagle Ford-focused Silver Bow Resources – executed deals in line with this strategy. On August 14, Silver Bow was able to acquire the remaining Eagle Ford of Chesapeake Energy
CHK
“That seems to us reflective of the current A&D market in the Eagle Ford rather than any underlying issues with the CHK assets other than the MVC associated with the assets,” Dittmar said in an email, noting that this latest sale completes Chesapeake’s move to become a pure-play natural gas producer focused on the Haynesville, Marcellus and Powder River play areas.
Just a week later, Permian Resources announced it was buying Earthstone Energy in an all-stock deal valued at $4.5 billion. “We believe the acquisition of Earthstone represents a compelling value proposition for our shareholders and strengthens our position as a premier Delaware Basin independent E&P. Earthstone’s Northern Delaware position brings high-quality acreage with core inventory that immediately competes for capital within our portfolio,” Will Hickey, Co-CEO of Permian Resources, said in a release.
Dittmar notes the overall strategic trend aspect of the deal, saying, “Given the ramp-up in the valuations of private equity assets over the last year, public company M&A is starting to look like a more attractive proposition for buyers to build scale.” In that regard, this deal enables Permian Resources to surpass both Matador Resources and Civitas Resources – which executed a pair of Permian acquisitions in July – to become the third-largest Permian pure play independent now, behind only Pioneer Natural Resources
PXD
Dittmar also emphasizes the role previous acquisitions of private equity (PE) producers by Earthstone played in enabling it to set itself up as an attractive takeover target. “PE acquisitions were necessary for Earthstone to build into the type of company that is an attractive acquisition partner for PR,” Dittmar says. “Before Novo, Earthstone rolled up Titus Oil & Gas and Chisholm Energy, building five to six years of Delaware Basin inventory that breaks even at less than $50/bbl WTI, just a bit beneath PR’s own inventory life of just over six years at that quality threshold.”
The Bottom Line
While several 2023 M&A deals have focused on other shale basins like the DJ Basin, Marcellus Shale and Haynesville region, the overall trend has tilted heavily to deals involving oily assets in the Permian/Delaware and Eagle Ford regions of Texas and New Mexico. Much of this has been driven by the relative health of the commodity price for oil when compared to natural gas, but there is no question gaining economies of scale, building inventories of equity drilling opportunities and increasing equity production during a time of falling rig counts have been the major motivators of this year’s M&A momentum.
It’s a trend that appears likely to endure for some time to come.
Read the full article here