Upstream M&A Struggles to Continue Despite Recent Rash of Mergers

Oil and gas companies, under pressure from the coronavirus, continued a rash of shotgun mergers on their way to a third-quarter 2020 M&A tally of $21 billion, according to analysis by Enverus.

Still, the pace of deals during the quarter slackened, and the remainder of the year is likely to see more of the same: a start-and-stop lurch toward consolidation for lower-debt companies. The industry also seems likely to continue condensing as unfavorable commodity prices force companies to stretch their financial reserves to breaking, Andrew Dittmar, senior M&A analyst at Enverus, said in a recent report.

“There is a broad consensus that consolidation is a net positive for the industry,” Dittmar said. “Including the corporate deals from 2019, that process looks to be well underway. There is room for further mergers, but it can be a challenge to find the right asset and balance sheet fits for accretive deals. It may take several more years for consolidation to play out.”

A rebound in deal activity is thought to only be possible through the dual influence of higher commodity prices as well as additional capital investments.

Enverus noted that some private equity capital sources have so far sat out 2020. The firm suggested that special purposes acquisition companies (SPAC) might be a potential source of capital and seems “to be gaining broader acceptance in the investment community with rising use across industries.”

For the quarter, Enverus counted 28 deals, tying its rate of transactions with first-quarter 2020 as the worst showing in 10 years. A handful of large corporate acquisitions helped pushed total transaction values up, led by Chevron Corp.’s agreement to buy Noble Energy Inc. for roughly $13 billion and Devon Energy Corp.’s merger with WPX Energy Inc. for about $5.6 billion.

The Chevron and Devon deals were both structured with little premium and all-stock considerations.

With roughly 60% of the quarter’s transactional value, Chevron’s acquisition of Noble Energy would be the fourth largest global upstream deal since 2014 at close. It’s also a notable return to the deal table for Chevron, following a failed attempt last April to purchase Anadarko Petroleum Corp. for $48 billion, including debt.

In a sign of how commodity prices have changed the M&A equation, Noble accepted an offer consisting of all-stock. Eighteen months ago, Chevron’s offer for Anadarko consisted of 25% cash, or $8 billion. Anadarko was ultimately purchased by Occidental Petroleum Corp.

In shale territory, Devon’s acquisition of WPX, which includes an oily position in the Delaware Basin, was notable for making up nearly all oil deal value in the quarter. Combined, the companies will represent $12 billion in enterprise value.

Permian Basin companies will likely continue to be the epicenter for shale consolidation because of their perceived advantages in economic well locations. However, natural gas consolidation, including Devon’s sale of its Barnett Shale assets to Kalnin Ventures LLC, continues to make noise.

In what Enverus counted as the third largest deal of the quarter, Southwestern Energy Co. acquired Montage Resources Corp. for $874 million. As with its oilier cousins, the transaction was structured with little premium and all-stock consideration.

“Regardless of the targeted play, mergers have so far focused on companies with reasonable debt loads,” added Dittmar. “Companies with impaired balance sheets are being left to find their own way, resulting in a spate of Chapter 11 filings.”

Third-quarter bankruptcies including California Resources Corp., Oasis Petroleum Inc., Denbury Resources Inc. and Chaparral Energy Inc., with combined for $15 billion in debt—more than all of 2018’s upstream bankruptcies combined, according to Enverus and Haynes and Boone data.