U.S. upstream dealmaking during 3Q2021 slid from the record-setting sequential activity, but the overall values transacted still topped the five-year quarterly average, according to Enverus.

Merger and acquisition (M&A) activity during 3Q2021 by U.S. exploration and production (E&P) companies was down 44% from 2Q2021. 

However, the $18.5 billion transacted overall was above the quarterly five-year average of about $16 billion, the firm said. The five-year average excluded the $57 billion takeover of Anadarko Petroleum Corp. by Occidental Petroleum Corp. in 2019.

“We have seen a red-hot market for upstream M&A since the industry recovered its footing from the initial shock of Covid-19,” said Enverus director Andrew Dittmar. “It was inevitable that the hungriest buyers and sellers would find their deals and activity would revert back toward the average. We seem to be hitting that inflection point.”

ConocoPhillips late in the quarter solidified its position as a top Permian Basin producer with the top deal by acquiring Royal Dutch Shell plc’s position for $9.5 billion. The transaction also moved the Houston independent into second place for total Permian production, according to Enverus. 

“In contrast with all the other large deals from the last 12 months that involved buying a company using equity, ConocoPhillips paid cash in this asset deal,” the firm noted. “Combined with a few more modest sized deals, the acquisition drove $12 billion in total Permian M&A in the third quarter, with the basin easily retaining its top position as most active for deals and most competitive for acreage.”

The Shell sale “was the most prominent example,” but Enverus noted the “broader uptick in asset deals collectively.”

Asset sales increased during the latest period, which is “a natural outgrowth of corporate consolidation as buyers comb through their expanded portfolios and find assets that don’t fit their development plans,” Enverus noted. 

Assets considered noncore for near-term development by public companies often create opportunities for the private equity (PE) sector. That was true in 3Q2021, as privately funded buyers increased their share of acquisitions to about 20% by value.

“Private equity still has dry powder for deals,” Dittmar said. “They are using this to target assets being tagged as noncore 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.”

PE investments clinched during the third quarter included one by Blackstone Group-sponsored Primexx Energy Partners LP, which sold its Permian Delaware sub-basin position to Callon Petroleum Co. for $788 million

As in nearly all recent PE exits, the Callon deal “included a healthy dose of buyer equity to the sellers,” Enverus researchers noted. As part of the deal, private investor Kimmeridge Energy Management Co. agreed to convert into common shares its remaining portion of Callon second lien senior notes once the transaction is completed. The equitization would save nearly $20 million a year in interest costs.

“With tailwinds from strong stock price performance for public E&Ps, that has been an additional source of value for sellers as shares have generally appreciated in value after the deals close,” noted Enverus researchers.

An exit option by the privates that hasn’t been widely pursued is via an initial public offering, or IPO.

Haynesville Shale E&P Vine Energy Inc. went public last March. Still, Vine ended its run as a standalone E&P when it agreed to a takeover in August by Chesapeake Energy Corp. for $2.2 billion. It was the largest corporate deal in 3Q2021, according to Enverus.

The Vine takeover “enhanced Chesapeake’s holdings in the Haynesville play as part of its shift toward natural gas,” Enverus noted. “The Haynesville is seen by producers as having more room to grow relative to Appalachia because of its infrastructure.”

Chesapeake already had exposure in each play, but other Appalachia pure-play E&Ps may look to add stakes in the Haynesville. In early June, Appalachian-focused Southwestern Energy Co. agreed to buy Haynesville producer Indigo Natural Resources LLC. 

“There are still opportunities for public company consolidation as well as potential private sellers looking to capitalize on price levels for both gas and oil not seen in years,” Dittmar said. “But the sense of urgency seems to have left the deal market. 

“Through the end of the year, we are likely to see mostly smaller sized asset deals as companies trim their portfolios with the chance of an occasional larger public company merger or private E&P sale.”