These deals were giant, unexpected or perhaps just haven’t received the attention to deserve. Here are five of the more intriguing U.S. E&P deals of 2021 and what they could mean (or not) for 2022.
1. One Permian to rule them all
Pioneer Natural Resources Co. CEO Scott Sheffield has been forging the One Ring for some time, first with his acquisition of Parsley Energy in 2021, then the acquisition of DoublePoint Energy, which created further synergies.
What’s to like: The Permian powerhouse added muscle to its muscle in the Midland Basin and generated $1.1 billion in free cash flow in third-quarter 2021. The company has also liquidated its remaining hedges.
But? What to do with all that Delaware Basin acreage? It found a willing buyer and closed the transaction in December for $3.25 billion. (See below).
Potential payoff: Subtracting the Delaware assets made Pioneer the largest pure-play Midland Basin operator. In the past three months, the company has increased its market capitalization by 20% to roughly $56 billion.
Key metrics: It’s the Permian. Also, Pioneer projected $175 million in annual cost savings, representing a net present value of $1 billion in cost savings over a decade.
Moves the needle? Pioneer planned to deliver $525 million in synergies by year-end, Cowen analyst David Deckelbaum said in August. G&A and interest savings of at least $115 million are already realized. And like any good consolidator, Pioneer idled two of DoubePoint’s seven rigs after the deal was closed.
2. Mother of pearl
Colgate Energy Partners III LLC made a trio of purchases in 2021 in the Permian Basin, two with seller Occidental Petroleum Corp., totaling at least $700 million.
Colgate executed what Christi Clancy, commercial general manager for U.S. shales at Shell, called a “string of pearls” strategy, forming an IPO-ready portfolio with assets in Reeves and Ward counties, Texas, and Eddy and Lea counties, N.M. Incidentally, the company is backed by Pearl Energy Investments and NGP.
What’s to like: A tale of patient capital. Colgate, founded in 2015, made its first $280 million acquisition in 2018 in Ward and Reeves counties, Texas, then went into (apparent) deep hibernation until last year.
But? The company’s IPO trial balloon stirred great curiosity concerning the prospects of an oil and gas IPO. However, the company is just as likely to sell if the right offer comes along or just go on printing cash while private. Only time will tell.
Potential payoff: A source familiar with Colgate’s thinking told Oil and Gas Investor the company values its assets at $5 billion. Others say $4 billion. Both are big numbers.
Key metrics: The company holds 108,000 net acres in New Mexico and Texas with estimated average daily production of 62,000 boe/d. A third deal early last year added the bankrupt but attractive assets held by Luxe Energy.
Moves the needle? A successful IPO would signal that investors are convinced E&Ps have atoned for their profligate spending, but E&P cash cows may be too late to prevail against the unrelenting winds of ESG change.
This article is part of the cover story “How E&P Deals Work Now” in the March 2022 issue of Oil and Gas Investor.
3. ‘Basin dominance’
Chesapeake Energy Corp.’s pain in the pandemic downturn brought it to bankruptcy after emergence from bankruptcy in February 2021 led it to renewal as one of the largest underdogs in U.S. shale.
With its eyes set on adding cash flow, in November it found its target in the Haynesville Shale with a $2.2 billion merger with newly public Vine Energy.
What’s to like: Chesapeake’s first acquisition since the 2018 merger with Eagle Ford oil-producer WildHorse Resource Development Corp. for nearly $4 billion returned it to its gas roots in the Haynesville. The deal increased Chesapeake’s Haynesville and LNG export exposure to 348,000 net acres with, Goldman Sachs noted, the transaction free cash flow accretive this year.
But? Hedge losses for fourth-quarter 2021, including a $538 million hit from gas hedges, will temporarily dampen the party. Wells Fargo senior analyst Nitin Kumar noted in January that strip prices have also come down sharply since October, which could put some pressure on Chesapeake’s free cash flow estimates.
Potential payoff: In rough numbers, Fitch Ratings estimated Chesapeake’s positive free cash flow would rise to $600 million between 2022 and 2024 before dividends. The post-bankruptcy advantage of almost no debt—less than 1x— held fast for Chesapeake.
Key metrics: CIBC calculated the deal would generate 4x cash flow returns during the next 12 months. Chesapeake added 123,000 net acres, nearly all in the dry-gas Haynesville in Louisiana and added Vine’s 1 billion cubic feet per day of gas production.
Moves the needle? As Wood Mackenzie noted, Chesapeake’s deal added it to the list of companies taking a “basin dominance” growth strategy that could potentially force competitors to take on larger consolidation roles.
4. The ‘Dude’ of deals
If there was one giant Big Lebowski deal—a mix of je ne sais quoi and the unexpected pleasure of bowling—to come out 2021, it was Continental Resources Inc.’s step into the Delaware Basin via an acquisition from Pioneer Natural Resources. Repeated examination of the transaction will likely transform the market’s initial befuddlement into a potential classic.
What’s to like: Continental’s $3.25 billion all-cash deal announced on Nov. 3 sets it up as an instant player in the Delaware with 92,000 net acres and average daily production of 52,000 boe/d of production. The deal added 650 gross locations in the Third Bone Spring/Wolfcamp A and B.
But? The immediate question on investors’ minds was what this might mean for Continental’s Bakken inventory. CEO William Berry told Oil and Gas Investor in February there are no issues with the company inventory either in the Bakken Shale, where Continental has nine rigs running—3x more than its nearest competitor. “There’s still a lot of good inventory in the Bakken,” Berry said.
Potential payoff: Continental had previously considered a deal roughly 20 years ago in the Delaware, but, well, its replete Bakken inventory was working just fine for them. They know the rock. The company now felt the time was right to execute based on a willing seller in Pioneer, headed by Scott Sheffield, who has a known bias for Midland over Delaware acreage.
Key metrics: Continental, with additional acquisitions in the Powder River Basin, maintains 1.0x net debt to EBITDAX by year-end 2022 at $60 WTI, which is conservative based on February strip prices. The company also said about 75% of its purchase prices was for PDP, meaning any upside was purchased at a healthy discount.
Moves the needle? Though more deals have recently been made by Continental in the Powder River Basin, Harold Hamm and company are not the types to guess on asset quality. They’re rock specialists. Looks like the band is getting back together.
5. Co-basin parenting
Through most of 2021, Coterra Energy Inc. was not a household name for investors, largely because it didn’t exist. Formed by the merger of Cabot Oil & Gas Corp. and Cimarex Energy Inc., the so-called merger of equals, Cimarex and Cabot’s $9.25 billion merger is an analyst darling even though it remains undervalued in the market.
What’s to like: Cabot’s 173,000 Marcellus Shale acres and Cimarex’s 560,000 net Permian and Anadarko Basin acres give returns to the E&P pure-play alternative: optionality amid two different commodity commodities. As natural gas and oil prices have risen, the company can throw off cash flow even if either commodity tanks and even, to some extent, if both do, according to analysts.
But? Some analysts have fretted that Coterra’s Marcellus Shale Tier 1 inventory is limited.
Potential payoff: The company boasts a diversified commodity mix to oil/NGL while maintaining upside exposure from higher gas prices this winter depending on weather demand, Goldman Sachs said. In January, Wells Fargo noted that Coterra’s shares had massively underperformed in 2021, with the company up 17% compared to the XOP Index’s 64% increase.
Key metrics: CIBC sees the company with the ability to generate greater than 6.0x cash flow. Goldman Sachs said in November it estimated a 12% dividend yield assuming 65% FCF in 2022.
Moves the needle? Did we mention cash flow generation? Goldman Sachs, Wells Fargo and Tudor, Pickering, Holt & Co. have all recommended buying the stock within the past three months, with Wells Fargo making Coterra one of its “Signature Picks.”
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