After several years of remaining on near life-support, the oil and gas M&A market slowly began to show signs of increased recovery in 2018 with oil prices finally trending higher though some volatility crept back toward the end of the year.

The Permian Basin remained king for M&A activity and led the way with consolidation and forcing noncore asset sales.

Concho Resources Inc. (NYSE: CXO) kicked off the year with its acquisition of smaller Permian rival, RSP Permian. Diamondback Energy Corp. (NASDAQ: FANG) was soon to follow with the Energen merger as well as its purchase of Ajax Resources, both building out Diamondback’s position in the prolific basin.

However, Michael Darden, partner of Gibson, Dunn & Crutcher and chair of the firm’s oil and gas practice group, noted other basins were active last year as well.

The Eagle Ford, for example, remained active, “probably more so than expected with the Chesapeake Energy/WildHorse transaction,” Darden said during a recent presentation, as well as Denbury Resources Inc.’s (NYSE: DNR) proposed deal for Penn Virginia Corp. (NASDAQ: PVAC).

The Scoop/Stack also percolated through Encana Corp.’s (NYSE: ECA) planned takeout of Newfield Exploration Co. (NYSE: NFX). The Appalachian Basin saw the mergers of PennEnergy Resources and Rex Energy plus the pending merger of Eclipse Resources Corp. (NYSE: ECR) and Blue Mountain Resources Inc.

The surprise entrant into the sweepstakes, though, was the Gulf of Mexico, Darden said, which saw not one but four mergers last year.

“All-and-all, 2018 was an active year for consolidation,” Darden said.

But what is in store for the state of oil and gas M&A as we begin 2019? Attorney’s Justin Stolte and Darden both worked to answer that question during Gibson Dunn’s 50-minute webinar, The Current (and Future) State of Oil and Gas M&A, on Jan. 24.

While neither made promises, both men predicted stability for the industry despite a rather volatile oil and gas market and a during a time when OPEC and its members have agreed to cut back production in hopes of stopping a freefall on prices. There are also other variables to consider such as the continued U.S. sanctions on Iran and now Venezuela.

“There is going to be volatility but it’s going to be volatility within our range now of $45 to $65 per barrel oil price on the oil side and then hovering around $3 per Mcf on the natural gas side,” said Stolte, who is a partner at Gibson Dunn’s Houston office and member of the firm’s M&A and energy and infrastructure practice groups. “What’s going to be really interesting to see is whether or not the sanctions on Iran are continued.”

The U.S. renewed sanctions on Iran last year with hopes of bringing Iranian oil exports to zero. However, the Trump administration also granted exemptions to certain customers temporarily allowing them to keep buying crude from the Islamic Republic, which are set to expire in the coming months.

“If they do expire and they are not extended then you could have a bunch of Iranian oil coming off the market and at the same time have OPEC curtailments coming into effect, which could serve as a tailwind to oil prices,” Stolte said.

But he warned a headwind could be coming, as well. The global economy is slowing plus there is uncertainty in Washington D.C. with continued tariffs on China and then a threat of another government shutdown. Those issues could adversely affect the oil and gas industry, making investors hesitant while slowing down deals for mergers and acquisitions in booming basins such as the Permian Basin and Eagle Ford.

“Those types of things create uncertainty, which leads to volatile price environments,” Stolte said.

Though, he pointed out that the cure for low prices is low prices.

“Once things hit a certain level you will start to see activity in the Permian, Eagle Ford and other unconventional basins decelerate,” he said. And if prices get too high, you will see production come along quickly. There are still a number of drilled but uncompleted wells in the U.S. that can quickly come online in the event that crisis justify them coming online.”

While uncertainty does loom, the potential for positives seem to outweigh the potential for another setback. When looking at what will drive M&A activity in 2019, Stolte said the continued lack of public capital and continued pressure on public companies to perform will force smaller midstream and upstream companies to be absorbed by bigger more efficient companies with cash flow.

“I think that a lot of the M&A activity and the upstream activity will be driven by our old friends scaling up and aggregating and consolidation,” he said.

Stolte also believes the New Year will bring a lot of small acreage trades and swaps, but there will be some big ones, as well.

“As one client says, it’s all about blocking it up,” he said noting continuous, blocked acreage leads to longer laterals, which leads to more frac stages and more production.

On the consolidation side, Stolte said it would be extremely difficult, though not impossible, to establish an acreage position organically given the stage of the game in most basins.

“Thus, getting into a basin and significantly improving one’s position in a basin requires acquiring an acreage position via buying out an existing company or public company merger,” he said. “I think these needs will drive a lot of consolidation.”

 

Onshore