Not counting the decade’s largest acquisition deal, the $57-billion Occidental takeover of Anadarko, 2019 saw only $39 billion in oil and gas deals. But if the $11 billion deals in December alone are anything to go by, 2020 is on track to be another major year for M&A in the industry.
And it’s all about the Permian basin--still.
That’s because the bigger players in the American shale patch are still hunting for cheap assets from their fellow operators who can’t stand the heat of shareholder pressure to deliver cash and profits.
What 2019 suggests is that the real M&A activity might just be getting started. While many expected the Occidental-Anadarko deal to spark a flurry of buyouts right away, the timing was just a bit off.
The only question now is: What comes next?
The $39 billion in 2019 deals outside of the stunning Occidental-Anadarko takeover in April included Callon Petroleum Co.’s $3.2-billion merger in July with Carrizo Oil and Gas Inc. as the second biggest deal in the U.S. shale patch, this time in the Delaware/Eagle Ford.
It also included the all-stock merger between Parsley Energy Inc and Jagged Peak Energy Inc--also in the Delaware basin--for an estimated value of just under $2.3 billion in October.
Hilcorp Energy’s $5.6-billion acquisition of BP’s Alaska assets was the highlight of August.
But it’s what happened in December that has caught everyone’s attention for 2020. Related: 2020 Will Be A Crucial Year For Oil
While the Alaska deal was also stunning, the Permian remains the key driver of American oil growth and the last quarter of 2019 made that clear: More than 60% of the Q4 M&A deal value was for the Permian.
The $2.5-billion WPX Energy Inc takeover of Felix Energy II may have just set the pace for the coming months.
Not only was this the biggest deal of Q4 2019 and the fourth-largest deal of the year, it was also the most celebrated. While Occidental’s stunning $57-billion acquisition of Anadarko resulted in shareholders punishing OXY stock, the response to WPX’s acquisition was the opposite, breaking a pattern for 2019 of buyers taking a hit on the market for M&A deals.
So for 2020, the die appears to have been cast: The market is expecting more deals, and the response to smart deals is likely to be positive--especially when we’re talking about premium property in the Permian.
Why 2020 Will Be Even Better
Quite simply, the deals are going to get better for those in the shopping mood.
Those smaller companies will be selling at a discount or facing too much debt, restructuring and possibly bankruptcy.
“From a buyer’s perspective, there are opportunities to shop for private equity portfolio companies that are ready for an exit or acquire the small- and mid-cap public companies that have been beat up on Wall Street,” according to Enverus, the leading oil and gas SaaS and data analytics company.
Now it’s a game of figuring out who the 2020 M&A buyers and sellers could be.
On the buyers side, the big producers are EOG Resources, ConocoPhillips, Pioneer Natural Resources, Noble Energy, Devon Energy and Diamondback Energy. All will have been paying attention to the response to the December WPX deal.
But we’ve also got potential buying power in ExxonMobil, Chevron and Shell, and to a lesser extent in BP and French Total SA. Related: Why Pirates Are Giving Up On Oil
And if you look at the smaller producers, you see WPX itself, Callon Petroleum, which just merged with Carrizo, Parsley Energy (also already part of the 2019 deal scene), Cimarex Energy, Centennial Resource Development and Laredo Petroleum (NYSE:LPI).
Exxon, for instance, won’t be looking at any single company that isn’t sitting on a large resource. But the smaller companies with strong financing capabilities just might. While Exxon might look at something like EOG Resources, EOG itself might look at something like much smaller Laredo, sparking off a chain reaction of mergers and acquisitions that push consolidation of the Permian to new heights in 2020.
Barron’s suggests seven potential M&A targets for 2020, including Laredo Petroleum, mentioned above, Centennial Resource Development (NASDAQ:CDEV), Matador Resources (NYSE:MTDR), QEP Resources (NYSE:QEP), SM Energy (NYSE:SM), WPX Energy (NYSE:WPX) and Halcon Resources (privately held).
And while all of these stocks are rising right now on a bump from Middle East tensions and fear of an all-out war with Iran, they’re also likely getting a bump--even if a cautious one--from expectations of their potential for M&A activity in 2020.
Who is targeted next will depend on they type of deal because Wall Street isn’t rewarding anyone these days for simply expanding in the Permian. It’s got to make sense, which is exactly what the WPX deal did. This isn’t about increasing production just to boost output numbers. It’s about consolidation for financial discipline. It’s about shareholder returns. Anything short of that will get punished on the after-deal market.
By Anes Alic for Oilprice.com
More Top Reads From Oilprice.com:
- What Will The Average Oil Price Be In 2020?
- The 10 Most Important Oil Market Trends For 2020
- Is This The Beginning Of A Shale Crisis?