Consolidation is a troubled industry's best friend—and last year's crisis in oil and gas brought about by the pandemic was no exception. Mergers and acquisitions started later than they normally do in an industry downturn, but we saw some sizeable deals nevertheless. Now, the M&A trend is set to continue, according to the latest reports. First, energy data analytics firm Enverus this week released its regular M&A report for the first half of the year, saying that despite a slow start to the year, dealmaking gathered pace in the second quarter. The total value of deals closed during that quarter hit $33 billion, Enverus said, adding that this was distributed across 40 deals, of which seven were worth more than $1 billion.
To compare, in the first quarter of the year, upstream deals totaled $3.4 billion, according to an earlier report by Enverus. The value of the deals in the first quarter compared with $600 million for the first quarter of 2020 but was significantly less than the $27.8 billion in deals recorded for the fourth quarter of 2020.
There are also indications that the consolidation drive will only accelerate during the second half of the year, and not just because oil prices are higher. It's a reflection of a wider M&A trend in the United States, jumpstarted by the Biden administration.
Last Friday, President Biden signed an executive order targeting improved competition within the U.S. economy. Among the stipulations in the order, there was one that calls for increased regulatory scrutiny of mergers and acquisitions going forward. While the prime targets of the order may be the tech and healthcare sector, both of which have seen a deal frenzy as Reuters called it, all industries will effectively be scrutinized more closely.
Related: Qatar: Peak Natural Gas Demand To Occur Around 2040 "The order itself will be less likely to have a chilling effect on strategic M&A than the potential chilling effect of a significant increase in the number of prolonged investigations and merger challenges brought by the agencies," one legal industry insider told Reuters in comments on the order and its implications.
This suggests appetite for mergers and acquisitions will likely decline before too long, but before that, companies will do as many deals as they can, especially since borrowing costs are still low. These borrowing costs are also going to be on their way up, per the latest comments from senior Fed officials, all of which seem to point towards a pending start to the winding down of the central bank's bond-buying that aimed to prop up the economy during the worst of the crisis.
Putting broader M&A trends and their causes aside, one interesting thing about this year's acquisitions in oil and gas is a shift from public to private targets, according to the Enverus report.
Last year, the firm noted, most acquisitions were between public companies. This year, public companies are targeting private-equity-backed, privately held independents. Pioneer Natural Resources' $6.4-billion takeover of DoublePoint Energy is one example of such deals, and EQT's acquisition of Alta Resources for $2.9 billion is another.
"The uptick in acquisition activity targeting private equity-backed E&Ps is likely a welcome relief for sponsors that were challenged to find exit opportunities over the last few years," said Enverus' senior M&A analyst Andrew Dittmar. "The deals targeting private E&Ps are less about cost-cutting synergies and more about adding inventory. That can be in a buyer's home basin, like Pioneer/DoublePoint, or entering a new area as Southwestern did by acquiring Indigo in the Haynesville Shale."
Greater buying appetite is welcome news for the private equity owners of oil and gas independents in light of the new Biden executive order as well. Commentators on the news noted that the order could make it harder for PE firms to sell companies they had acquired earlier and invested in because of the closer scrutiny. On the other hand, PE firms face less scrutiny as buyers so they may start buying in oil and gas again.
Inventory addition is not the only concern of today's buyers in oil and gas. Environmental, social, and governance considerations are also high on the priority list this time, according to Enverus data.
"You see them talking almost as much about ESG as they do cash flow," Dittmar told Forbes' David Blackmon. "It's important to investors and they want the deals to be 'ESG-accretive,' essentially. I think that definitely steers buyers towards companies that are already doing a good job meeting their ESG goals, and who have asset-types that are going to be manageable under their own goals."
So, it's likely that we will see more mergers and acquisitions in the oil and gas space through the end of the year unless the grim warnings of another wave of Covid-19 infections materialize, which would depress all industries again. Still, the chances of that are relatively slim given vaccination rates in the United States, so the oil and gas industry is set to end the year with possibly a lot fewer players than it started with.
By Irina Slav for Oilprice.com
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