Posted on February 5, 2020
Operators’ efforts to become cash-flow positive beginning to pay off
— By Mella McEwen firstname.lastname@example.org
Unconventional shales are evolving from a growth industry to a mature industry generating dividends and share buybacks for its investors.
But completing that transformation and laying a foundation for the next decade requires consolidation among oil and gas producers and a healthy mergers and acquisitions market, something that wasn’t seen in 2019.
A healthier M&A market is forecast for 2020 as investors begin to regain some confidence in the industry, according to a report from Enverus.
“Companies have been working on plans to be cash-flow positive,” Andrew Dittmar, senior M&A analyst at Enverus, said in a phone interview from his Austin office.
He said companies have been cutting capital expenditures and streamlining operations.
“We’re seeing that beginning to pay off, especially for those companies with top tier acreage, who are at the tipping point of positive cash flow,” he said.
Operators have also enjoyed the tailwind of improved oil prices, he said.
Major Permian Basin players such as Pioneer Natural Resources, Diamondback Energy and Parsley Energy have begun paying dividends and buying back stock and are generating more investor interest, he said.
A healthier M&A market this year means the long-expected consolidation among operators could pick up steam, he said.
Smaller companies that drilled new wells with high decline curves or took on a lot of debt are still far from being cash-flow positive, and “for them, there’s more pressure to sell,” Dittmar said.
There is a pretty broad consensus that developing resources such as the Permian Basin’s unconventional shales puts larger companies in a better position, he said. These companies can put together larger contiguous acreage positions that allow them to drill longer laterals. He said larger companies are also in a better position to secure pipeline takeaway capacity and build favorable relations with service companies.
“Deals still have a lot of pieces that have to come together: The buyer has to be willing to make a move and the seller has to see the assets as a fit. It’s a case of the right seller and the right buyer coming to a price they’re both happy with,” he said.
Sellers may be coming to terms with a market more accepting of $10,000 per acre as opposed to the $30,000 to $50,000 per acre seen at the peak of ‘Permania’ in 2016-2017, he said.
Dittmar estimated WPX Energy’s recent purchase of Felix Energy II, an EnCap-funded operator, equaled about $10,000 per acre. He said buyers taking equity positions, as in WPX’s purchase of Felix or Parsley Energy’s purchase of Jagged Peak Energy, show’s there’s room for creative deal structures.
Other deal structures include joint ventures, drillcos and purchasing overrides.
More confidence from investors will bring more capital int the industry, he said. In the meantime, much of the capital the industry uses will be generated internally, Dittmar said.
“If operators can show they’ve turned the corner, investors will look at the industry again,” he said.
But that could require patience.
“Investors are looking for value. They’ll be cautious,” he said.
Tracking M&A market
Enverus tracked $96 billion of U.S. oil & gas M&A in 2019, including $11 billion in the fourth quarter. However, the annual total was substantially skewed by Occidental’s $57 billion acquisition of Anadarko, which was also the largest deal of the decade and the fourth largest oil & gas deal ever.
Exempting the Occidental/Anadarko deal, 2019 saw $39 billion in deals or just one-half of the average $78 billion for annual U.S. oil & gas M&A during the last 10 years. During that time, $567 billion was spent on shale assets or 73 percent of the total.
Most of 2019’s other marquee deals aside from Occidental-Anadarko also focused on the Permian. After Occidental/Anadarko, 2019’s largest corporate deals were Callon’s $2.7 billion merger with Carrizo, WPX’s $2.5 billion buy of private Felix Energy II and Parsley’s $2.3 billion acquisition of Jagged Peak.
The Permian continues to be a key driver of U.S. oil growth and a significant contributor to M&A including accounting for more than 60 percent of Q4 2019 value.