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Oil Price Rally Sees Large Jump In M&A Activity

Shale tower employee

A year ago, oil producers in the shale patch were the object of a kind of sympathy – barely alive, many of them on the verge of bankruptcy, some eventually falling over that brink. Now, those that survived have been brought back to life by the oil price rally and are once again ready for growth. A lot of growth, according to M&A information.

Over the last 12 months, the number of M&A deals in the shale patch rose to 385 from 285 in 2015, according to industry research firm PLS. More impressive was the rise in total value, however, to US$69 billion last year from US$32 billion in the year before.

It looks like the trend is gaining traction, too, and quickly. In about a month, from late November to the end of December 2016, there were 11 deals with a combined value of US$31 billion, which is already almost half of the total for 2016. That’s certainly a signal of the changing winds that are seen by many to strengthen further as 2017 rolls on.

It’s worth noting that all these deals involved the purchase of upstream assets, rather than corporate acquisitions, signaling a recovering appetite for production expansion. The first month of 2017 has seen a few more deals, among them, notably, a US$6.6-billion asset acquisition by Exxon in the Permian, the friendly takeover of Permian-focused Clayton Williams by Noble Energy, worth US$2.7 billion, and Anadarko’s exit from Eagle Ford that generated US$2.3 billion to be used for expansion, among others, in the Permian.

The Permian – the star shale play of the U.S. – is the center of the M&A flurry, a “Permania” that will be the main driver of mergers, acquisitions, and asset buys this year. The FT cites data from Drillinginfo, which show that breakeven price levels for 13 Permian operators at their most productive acreage are between US$20 and US$40. This, the industry says, was made possible by consistently lowering production costs through technological innovation. Related: Trump’s Advisers Draft First-Day Energy Policy Changes

As we wrote last October, this is not the entire truth, with high-quality acreage and low oilfield services prices contributing substantially to the lowering of breakeven levels. Nevertheless, the Permian does seem to be considerably more attractive to all sorts of investors, not just from the energy industry, especially after late last year the U.S. Geological Survey announced that the Wolfcamp Basin, part of the play, could be the biggest untapped oil and gas shale deposit discovered so far in the shale patch, with reserves estimated at 20 billion barrels of crude.

Besides booming acquisition activity in the Permian, the U.S. energy industry will also see a substantial increase in consolidation deals, according to Goldman Sachs’ global co-head of M&A Gregg Lemkau. Smaller players who have been hanging by the skin of their teeth over the last year and a half are now becoming potentially attractive acquisition targets for the bigger guys who have the money to afford such acquisitions and enjoy the synergies.

The future, at least the immediate future, looks rosy for the shale patch – February will see oil rigs in the Permian produce an additional 660 bpd. Across the shale patch, the number of rigs is also rising, with a massive weekly gain of 35 rigs this week bringing the total number of active rigs up to 694. WTI and Brent are both above US$50. Optimism rules, and its rule is set to continue at least until the end of the first half of the year, when the deal among OPEC members and 11 other oil producers to curb production will expire.

By Irina Slav for Oilprice.com

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  • ironmaster1963@mchsi.com on January 22 2017 said:
    Shale is 5%. Insignificant and has never cash flow positive. It is bad business to spend time and the human resource to promote 5% of a inventory no matter what the product is. 95% is where the advertisement should be. Just simple business 101. It amazes me that shale talk is so extraordinary. There must be some conspiracy theory at play here. Warmest regards and have a blessed Sunday.

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