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Irina Slav

Irina Slav

Irina is a writer for Oilprice.com with over a decade of experience writing on the oil and gas industry.

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The New Acquisition Strategy Of U.S. Shale

  • The value of mergers and acquisitions in U.S. shale fell by 65% in the second quarter of 2022 compared to a year earlier.
  • Now, interest in acquisitions appears to be growing for both private equity firms and shale drillers as they look to take advantage of high prices.
  • Recent acquisitions are designed to increase value for the shareholder, with companies buying mature wells to refrac rather than more expensive options.

U.S. shale oil producers have been in Washington’s sights for several months now, refusing to produce as much oil as legislators and the White House want them to. They have also been attacked for reaping fatter profits from higher oil prices. And now they may be starting to consolidate again.

Last month, Energy analytics provider Enverus reported that the value of mergers and acquisitions in the U.S. shale industry fell to $12 billion in the year's second quarter. This was a solid 65-percent drop from 2021.

Enverus Intelligence Research Director Andrew Dittmar attributed this to disagreements between buyers and sellers about the value of assets in the environment of heightened uncertainty around oil prices.

He noted, however, that private equity firms are still well placed for acquisition deals in the shale space, especially for so-called non-core assets that fetch better prices.

“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,” Dittmar said in July.

Yet it’s not just private equity firms. Shale drillers are also doing business in acquisitions, and these may pick up, according to energy analyst and consultant David Blackmon. In a recent article for Forbes, Blackmon noted the acquisition by Devon Energy of Validus Energy, an Eagle Ford-focused shale company, for $1.8 billion.

The deal, which closed this month, will add 42,000 net acres to Devon’s own acreage in the Eagle Ford and follows Devon’s acquisition of acreage from RimRock Oil&Gas in the Williston Basin across Montana and the Dakotas. The seller was a portfolio company of Warburg Pincus.

“Companies want to capture as much value as possible while commodity prices are high and adding barrels that are already online is the surest way to do that,” Enverus’s Dittmar told David Blackmon.

“It also matches investor preferences for immediate capital returns as it is easy to show line-of-sight from a deal like this with its strong cash flow accretion and a boost to dividends and buybacks.”

Dittmar referred to the fact, noted by Blackmon as well, that the assets Devon recently acquired are not exactly untapped reservoirs. These are mature assets that, under other circumstances, would not have been the first choice of buyers flush with cash from higher prices for their product.

Yet right now, the shale industry appears to be exclusively focused on value rather than production growth and is acting accordingly.

Blackmon sums it up as follows: “As has been the case in every previous oil boom anywhere in the world over the past 170 years, the formula for success in U.S. shale is constantly evolving. Many industry critics scoffed at the idea of refracs in the Eagle Ford just a decade ago, claiming they would be uneconomic and maybe even technically unfeasible for the formation. Today, the technique is becoming positively trendy, cash flow accretive and additive to shareholder value.”

Indeed, re-fracs are on the rise in the shale patch. The reason: higher production and material costs, which make drilling an all new well more expensive than many drillers seem to be ready to pay. So they are turning to secondary fracking in already drilled wells to keep their costs low but expand production.

It will certainly be a while until M&A activity in the shale patch expands the way it expanded in previous cycles. The pandemic made this latest cycle unique in more than one way, and this cycle made the industry more cautious than it has ever been.

But as Forbes’ Blackmon noted, it’s a constant evolution. In their bid to drive more value for shareholders, which appears to be the number one priority for many public shale oil companies, they might just turn to more acquisitions yet.

By Irina Slav for Oilprice.com

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