Reports of supermajor ExxonMobil holding informal discussions to buy the top pure-shale firm, Pioneer Natural Resources, reignited market talk about the start of the next phase of mergers and acquisitions in the U.S. oil industry.
Operators and acreage in the top oil-producing basin, the Permian, are expected to make the biggest waves in a new consolidation stage, analysts say.
This year, the M&A activity in the shale patch could pick up as most oil producers generated record cash flows in 2022 and are looking to grow by adding top-tier assets adjacent to their acreage. In addition, small and mid-sized firms could seek mergers with peers as they are likely struggling to either find buyers or sellers, or access debt markets with the rise in interest rates, according to various analysts and investment banks.
An Exxon-Pioneer Deal Triggers M&A Talk
Several deals in the industry have already been announced this year, but the real merger talk on the market was triggered earlier this month with the rumors that ExxonMobil held early informal talks about potentially acquiring the largest pure-play shale producer, Pioneer Natural Resources.
Exxon is looking to boost its position in the U.S. shale patch, and it has said for years that the Permian basin would be its key priority area for investments and growing production in the coming years.
Exxon and the other supermajor, Chevron, could strike blockbuster deals in the Permian over the next two years, Andrew Dittmar, a director at Enverus, told Reuters. Marathon Oil Corporation and Devon Energy could also be likely buyers in M&A deals, according to Dittmar.
Moreover, inflation could also be a trigger for a wave of consolidation this year, according to Muhammad Laghari, a senior managing director at investment bank Guggenheim Securities.
"M&A is probably right now, in this inflationary environment, the most cost-efficient way to increase your cash flow per share," Laghari told The Wall Street Journal after reports of Exxon-Pioneer talks surfaced.
Even before the rumors of a potentially huge deal broke, analysts had expected a pick up in deal activity.
"With substantial capital on hand from soaring energy prices in 2022, energy companies are seeking to deploy it via acquisition or to return it to shareholders," Tom Miles and Brian Healy, Co-Heads of Americas M&A at Morgan Stanley, wrote in a February report on the bank's M&A outlook for 2023. Related: China Set To Slash Fuel Export Quotas
"Mid-sized energy companies need scale to compete and may seek consolidation opportunities," they said.
The cash for deals is there as long as there is a willingness for M&A, according to Wood Mackenzie.
"The US Independents are the group that underpins most US M&A activity, most of the time. They certainly have the capacity to boost M&A in 2023. But do they have the appetite?" Greig Aitken from Corporate Research at WoodMac's upstream M&A research team, said in a 2023 outlook.
U.S. independent producers are much stronger financially now compared to any time in the past decade.
"And financial health continues to improve," Aitken said.
If the WTI Crude price averages $84 per barrel in 2023, WoodMac expects that almost every company in a peer group of 37 U.S. Independents could be in a position to buy.
"If they want to."
Industry Expects Consolidation, Too
Executives at top U.S. oil firms also believe that the industry needs to go through another round of consolidation.
"I've said for the last year or more that consolidation needs to happen," ConocoPhillips CEO Ryan Lance told Bloomberg Television in an interview earlier this month.
"There are synergies that can happen, there are costs that can come out of the system, there are better efficiencies that can come with some M&A. So I do believe that M&A is going to continue in this space, it needs to continue in the space to be a healthy business," Lance added.
Signs have emerged in recent weeks that M&A activity is already picking up, bankers and lawyers told the Financial Times earlier this year.
"They're out there shopping for more inventory. And we're back in the business of selling Permian businesses with prime locations to sophisticated parties at real valuations," Pete Bowden, global head of energy banking at Jefferies, told FT.
For private companies and private equity investors, non-core assets divested by larger companies may be attractive, PwC said in its Energy: US Deals 2023 outlook.
"Even in the traditional oil space, they can recognize these properties still hold short-term value."
This year has already seen some major deals. VTX Energy Partners, the U.S. upstream company of oil trading giant Vitol, said in January it would acquire Delaware Basin Resources for an undisclosed sum.
"We are eager to continue growing our position in the US Lower 48 as we anticipate US oil to remain an important source of supply to global energy balances," said Ben Marshall, Vitol Head of Americas.
Matador Resources also struck a deal last month to buy Advance Energy Partners Holdings, in a strategic bolt-on acquisition in the Delaware Basin in the Permian, for an initial cash payment of $1.6 billion.
Matador's founder, chairman, and CEO Joseph Wm. Foran said, commenting on the deal,
"We have carefully managed and strengthened our balance sheet over time in order to be in a position for a special opportunity like this."
By Tsvetana Paraskova for Oilprice.com
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Tsvetana is a writer for Oilprice.com with over a decade of experience writing for news outlets such as iNVEZZ and SeeNews. More