Second-quarter M&A brought out private-equity (PE) firms looking to cash in on high prices as public company dealmaking was sidelined by volatility in commodity and equity markets, according to a July 14 report by Enverus.

“As anticipated, the spike in commodity prices that followed Russia’s invasion of Ukraine temporarily stalled M&A as buyers and sellers disagreed on the value of assets,” wrote Andrew Dittmar, director at Enverus Intelligence Research, a subsidiary of Enverus. “High prices, though, also encouraged a rush by PE firms to test the waters for M&A. While not everyone that is going into the market is getting what they deem to be a suitable offer, enough are to drive modestly active upstream M&A.”

Hart Energy July 2022 - Enverus Quarterly Upstream Deal Report - Andrew Dittmar headshot“Looking forward I don’t think we will see any shortage of assets available for sale by private equity firms across every major shale play. The challenge is finding buyers willing to pay their asking prices.”—Andrew Dittmar, Enverus

The Permian Basin remains the main engine of Lower 48 M&A, Enverus said. About 46% of the quarter’s total deal value came from a merger-of-equals between private E&P Colgate Energy Partners III, which is focused on the Delaware Basin part of the Permian, and public Centennial Resource Development Inc.

Colgate had considered an IPO, but Dittmar said “public equity markets are retaining a multiyear trend of being essentially closed for private E&Ps to launch a traditional IPO.”

“That leaves M&A as the main exit route,” he said. “There is appetite on the public company side to buy out private E&Ps, but public companies need to keep the valuation paid on these deals in line or less than where the market is pricing their own stock. With E&P equity valuations still modest, in many cases there may not be much room to raise offer prices.”

Other deals in the quarter focused on large multi-region transactions for nonoperated interests. That included the merger of Grey Rock Energy Partners and Paul Ryan-affiliated Executive Network Partnering Corp.

The $1.3 billion combination formed Granite Ridge Resources, a new public nonoperated working interest owner with further consolidation plans. The deal highlighted how special purpose acquisition companies, known as SPACs, can be used to circumvent the challenges of IPO markets, Enverus said.

The analytics firm also noted an uptick in the use of debt to pay for deals in recent weeks. Debt financings allow companies to make accretive deals that provide additional cash flow and can also be used to pay down loans and keep leverage in check.

“Looking forward I don’t think we will see any shortage of assets available for sale by private equity firms across every major shale play,” Dittmar said. “The challenge is finding buyers willing to pay their asking prices.”

“Public E&Ps remain chiefly concerned with getting capital back to shareholders and being too aggressive on M&A can smack of growth investors don’t want,” he continued. “That said, the flood of offerings should create opportunities for shrewd deal makers to unlock value with M&A and, if we avoid a major recession, the fundamentals for energy prices still look strong.”

Source: Enverus M&A Analytics

Quarterly Deal Flow Since Second-quarter 2020 ($B)

U.S. Region 2Q 2020 3Q 2020 4Q 2020 1Q 2021 2Q 2021 3Q 2021 4Q 2021 1Q 2022 2Q 2022 % of 2Q 2022
Permian $1.1 $0.2 $22.9 $0.5 $9.3 $11.7 $5.0 $4.3 $5.5 46%
Multi-region $0.1 $18.7 $2.5 $0.1 $13.9 $1.6 $0.3 $0.3 $3.2 27%
Rockies $0.1 $0.0 $0.6 $2.0 $4.0 $0.7 $0.5 $7.2 $1.4 12%
Midcontinent $0.2 $0.1 $0.4 $0.0 $0.2 $0.1 $0.7 $0.1 $0.8 6%
Gulf Coast $0.0 $0.1 $0.2 $0.9 $0.1 $1.3 $0.2 $0.0 $0.6 5%
West Coast $0.0 $0.0 $0.0 $0.0 $0.1 $0.1 $0.0 $0.1 $0.3 2%
Ark-La-Tex $0.0 $0.3 $0.1 $0.0 $3.1 $2.6 $2.4 $0.0 $0.1 1%
Gulf of Mexico $0.1 $0.5 $0.5 $0.0 $1.0 $0.2 $0.0 $0.1 $0.0 0%
Eastern $1.3 $1.3 $0.8 $0.3 $3.0 $0.4 $0.3 $2.8 $0.0 0%
Alaska $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 0%
Total $2.9 $21.2 $28.1 $3.7 $34.8 $18.6 $9.4 $14.7 $12.0 100%