The last two energy crises that threatened hundreds of energy companies with bankruptcy have rewritten the oil and gas M&A playbook. Previously, oil and gas companies made numerous aggressive tactical or cyclical acquisitions in the wake of a price crash after many distressed assets became available on the cheap. However, the 2020 oil price crash that sent oil prices into negative territory has seen energy companies adopt a more restrained, strategic, and environment-focused approach to cutting M&A deals. It is, therefore, hardly surprising that Big Oil executives have been somewhat trigger-shy after the last M&A wave turned into a disaster for acquiring companies.
According to data released by energy analytics firm Enverus, U.S. oil and gas dealmaking contracted 65% Y/Y to $12 billion last quarter, a far cry from $34.8 billion recorded during last year’s corresponding period, as high commodity price volatility left buyers and sellers clashing over asset values.
"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," said Andrew Dittmar, a director at Enverus Intelligence Research.
Enervous has reported that deals by private equity firms saw a significant uptick in the first quarter as they bought assets that oil companies deemed as non-core to their development plans. These assets tended to lay outside oil-prolific areas like the Permian Basin of West Texas and New Mexico.
“Private equity still has dry powder for deals. They are using this to target assets being tagged as non-core by public companies. Once you step out of the core of the Permian Basin and a few other key areas, competition for deals drops, and these positions are often available at buyer-friendly price points. That said, private equity is still a net seller in the space and likely to remain so for the foreseeable future given the number of investments outstanding and how long that capital has been deployed,” Dittmar has remarked.
Still, dealmaking in the U.S. oil and gas industry remains alive and well, with energy executives still cutting significant deals. Here are the more notable ones.
EQT Corp Buys Rival THQ Appalachia and XcL Midstream’s Assets For $5.2B
Back in May, Pittsburgh, Pennsylvania oil and gas producer EQT Corporation (NYSE: EQT) unveiled a plan to produce more liquified natural gas (LNG) by dramatically increasing natural gas drilling in Appalachia and around the country's shale basins, as well as pipeline and export terminal capacity, which it said would not only boost the United States’ energy security but also help break the global reliance on coal and on countries like Russia and Iran.
Well, EQT is moving fast to realize its LNG ambitions: confirming earlier speculation, EQT Corp announced on Tuesday that it has agreed to acquire THQ Appalachia's upstream assets and XcL Midstream's gathering and processing assets for a combined $5.2B in cash and stock,
Owned by privately held gas producer Tug Hill Operating, THQ Appalachia and XcL Midstream are backed by equity commitments from funds managed by Quantum Energy Partners. CEO and founder of Quantum Energy PartnersWil VanLoh is expected to join EQT's board of directors after the merger. EQT has revealed that the assets acquired include ~90K core net acres offsetting its existing core leasehold in West Virginia, producing 800M cfe/day and expected to generate free cash flow at average natural gas prices above ~$1.35/MMBtu over the next five years. The company also doubled its buyback program to $2B and said it is increasing its debt reduction plan by year-end 2023 to $4B from $2.5B.
EQT has been one of the Shale Patch’s most active dealmakers, buying up assets and companies around the Marcellus in a bid to consolidate the company’s position. Last year, the company bought rival Marcellus producer Alta Resources for $2.92bn. EQT CEO Toby Rice’s bet has paid off this year as natural gas prices have soared to their highest levels in more than a decade.
Sitio Royalties To Merge With Brigham Minerals In $4.8 Billion Deal
Oil and gas mineral and royalty company Sitio Royalties Corp. (NYSE: STR) is headed for a merger with Brigham Minerals (NYSE: MNRL) in an all-stock deal with an aggregate enterprise value of ~$4.8B thus creating one of the largest publicly traded mineral and royalty companies in the United States.
The deal will become one of the largest tie-ups in the U.S. oil patch this year, and comes in a period of elevated oil prices.
Like the rest of the industry, Sitio and Brigham have seen both their top-and bottom-lines expand at a brisk clip on the back of rising oil prices. Combining the two companies will allow the new entity to achieve significant economies of scale and become a leader in the minerals-rights industry.
The merger will create a company with complimentary high-quality assets in the Permian Basin and other oil-focused regions. The combined company will have nearly 260K net royalty acres, 50.3 net line-of-sight wells operated by a well-capitalized, diverse set of E&P companies, and pro-forma Q2 net production of 32.8K boe/day.
The deal is also expected to bring in $15 million in annual operational cash cost synergies.
Sitio and Brigham shareholders will receive 54% and 46% of the combined company, respectively, on a fully diluted basis. Sitio Royalties recently reported Q2 net income of $72M on revenues of $88M.
Mineral owners receive a 12.5% to 20% cut of the oil and gas pumped on their land in the form of royalty payments. They don’t control the pace of development, but also aren’t on the hook for drilling or overhead costs, either, meaning they directly reap the benefits of high commodity prices.
By Alex Kimani for Oilprice.com
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