US oil, gas M&A stays active with focus on combining midsize E&Ps for scale

In the wake of ConocoPhillips’ announcement of a deal to acquire Marathon Oil Corp., the wave of US oil and gas M&A continues with a focus on building large positions in the Permian Basin. But the dealmakers will change from supermajors to large independent producers combining forces to get the benefits of size and scale, analysts told S&P Global Commodity Insights. “While there are still a few notable privates left in oily basins, it seems increasingly likely that public-to-public deals may dominate headlines over the next 12 months given a dwindling list of dance partners,” Tudor Pickering Holt’s head of research, Matt Portillo, told clients June 3.

Lots of deals in the works

The number of potential oil and gas deals in the works was up 13% year over year for the six-month period that ended in March, according to Mark Williams, the chief revenue officer for Datasite Global Corp. The software company operates data rooms and provides back-office support for pending deals and dealmakers. “Since these are deals at their inception, rather than announced, it provides a good indication of what is to come in the next six to nine months,” Williams said in a June 4 email. “Driven by maturing business models, large producers have been turning to dealmaking to strengthen their market position, especially to secure lower-cost reserves,” Williams said. “This trend is likely to continue into the second half, and even trickle down to the small and mid-markets.”

Large independent E&Ps need to get larger

Combining large independent producers will be the next step for mid-sized exploration and production companies (E&Ps) to stay relevant, Tortoise Capital Advisors managing director Rob Thummel said in an interview June 4. “I think they might have to consolidate to get bigger amongst themselves, to become attractive, to scale, for a larger producer down the road,” Thummel said. Strong cash flows and larger, stronger balance sheets are the chief attraction of merging two or more independent producers, according to Dennis Kissler, senior vice president for trading at Oklahoma regional bank BOK Financial Corp. “They want to get bigger in those areas, because their balance sheet looks tremendous. They have great access to capital.” APA Corp., Ovintiv Inc. and Murphy Oil Corp. are operators with “really high free cash flows,” Thummel said.

“We’ve seen a lot of the majors already do this,” Kissler said. “I think you’re going see some consolidation to some of these mid-sized companies for the same reason. You get the bigger access to capital.”mMid-sized and smaller companies are in a bind because better returns are available elsewhere, Kissler said. “Smaller producers and smaller companies are looking for those assets, but they can’t pay the level that they’re being asked and make them work at today’s prices,” Kissler said. “They’re going to need natural gas somewhere with close to a $4[/MMBtu] handle, and they’re going to need crude oil somewhere with $80 [per barrel] handle.” “To be honest with you, I’m a commodity trader,” Kissler said. “I can go out and buy the backend futures of both crude and the natural gas probably cheaper than these guys can buy some of these noncore assets right now. And I don’t have to hire anybody.”

Chevron could re-enter scene

Chevron Corp.’s pending $53 million acquisition of Hess Corp. contains a wild card. The deal is hung up while Hess, Chevron, China National Offshore Oil Corp. and Exxon haggle over whether Exxon and CNOOC have the right of first refusal to buy Hess’ non-operated stake in Exxon’s Guyana offshore oil operations. Without Guyana, Chevron will walk away from the Hess acquisition, Tortoise’s Thummel said, and will be back in the hunt for another large operator. Thummel named Devon Energy Corp. and EOG Resources Inc. as potential partners for Chevron in that scenario.