M&A remains overripe, with deals turning to rot on inventory shelves and oil companies forced to wait even longer for their Kool & The Gang’s Deal-a-bration to come.
The COVID-19 pandemic remains firmly in command, leaving E&Ps to watch helplessly as the virus parties in Florida, rides tall in Texas and dreams in California. Much work remains to rein in the virus (or extremely lethal hoax). The national strategy for COVID-19 testing remains, “Testing is highly contagious.”
Still, if there is hope for an end to the pandemic and some return to normal oil demand, OPEC+ has arrived just in time to annihilate any E&P optimism. Recall in May when OPEC and countries such as Russia agreed to cut production by 9.7 MMbbl/d following mass oversupplies created by OPEC+ (and then the pandemic).
That rollback, naturally, never really hit 9.7 MMbbl/d.
OPEC said it intends to increase production by 2 MMbbl/d, keeping 7.7 MMbbl/d of production off the table.
If this plan sounds bad, worrisome, ineffective, lacking in foresight or kindergarten-ish, stop thinking negatively. The way OPEC figures it, compliance with the May cutsthrough July was 89% (or 8.6 MMbbl/d).
OPEC+ has declared that their member-cheaters will “make up” for their naughtiness by really, really cutting back this time, pinky swear. So in reality, the 7.7 MMbbl/d cut would actually be 8.1 MMbbl/d to 8.3 MMbbl/d, as OPEC sees it.
Options to describe this plan include 1) foolproof, 2) unworkable or 3) oilmagedon.
With prospects for deals in flux through the rest of the year, dealmaking continues to be a game of pin the tail on a fast moving 18-wheeler.
The bracing postmortem on second-quarter 2020 shows just $2.6 billion in upstream M&A transactions, according to Enverus. That compares with $770 million in dealmaking during the first quarter. While the second quarter haul represented a 200% increase over the first, hold off on your A&D parade float. The second-quarter deal total is the third lowest transaction haul in a quarter since 2009.
Oil, perhaps unsurprisingly, took a backseat to natural gas deals in the second quarter.
Three Appalachia deals totaled more than $1 billion in transaction value. However, top deal honors went to HighPeak Energy’s combination with blank-check company Pure Acquisition Corp. at $845 million. Yet, the Permian Basin centered merger proceeded after a renegotiation of terms and a third player, Grenadier Energy Partners II, dropped out of the deal.
Overall, gas increased its share of M&A to 30% year to date from 5% in 2019, Enverus said.
“With the uncertainty around oil, the limited buyers largely targeted low-cost natural gas assets during Q2,” said Andrew Dittmar, senior M&A analyst with Enverus. “Broadly, the market for new deals remains highly challenged, particularly in oil plays.”
Enverus also cited contingency payments, largely linked to commodity prices, as a by-product of market uncertainty. Though such payments have been a mainstay in deals for some time, they appear to be closing the bid- ask spread on the rare occasion that a deal is close enough.
In the thin broth of the second quarter, M&A did pick up some seasoning from royalty deals, which accounted for about 20% of deal value in the second quarter, Enverus said.
Institutional capital bought the main royalty deals in the quarter, including Sixth Street Partners and a $100 million acquisition by EnCap-sponsored Pegasus Resources in the Permian.
“Royalty and mineral interests remain a popular way to gain exposure to oil and gas upside while limiting the financial risks inherent with participating in working interests in a volatile market,” said John Spears, director of Market Research with Enverus.
For now, about $5 billion worth of assets are available for purchasing, including bankruptcy sales processes in the Permian, Eagle Ford Shale and other regions.
But the remainder of the year’s deals will likely involve gas assets (while prices are good) and could come to include the low cost supply areas in the Texas and Louisiana Haynesville. Barring a miraculous rally, oil looks likely to remain the New Coke of commodities.
Going further into the future, Goldman Sachs analysts said in a July report not to expect serious consolidation and “balance sheet healing” until around the first half of 2021 for most E&Ps.
Kool will keep. Put them on your playlist. By next year, hopefully we’ll be singing, “Bring your good times and your laughter too. We gonna celebrate your commodity with you.”
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