Following an overall paltry return for Lower 48 oil and gas property sales in 2019, the dealmaking market may be looking for a repeat, as well-financed operators prowl for quality assets at bargain prices, according to energy data specialist Enverus.

The Austin, TX-based firm tracked $96 billion of domestic merger and acquisition (M&A) activity in 2019, including $11 billion in the final three months. However, the annual total was “substantially skewed” by Occidental Petroleum Corp.’s $57 billion acquisition of Anadarko Petroleum Corp., the largest deal of the decade and the fourth largest oil and gas transaction ever.

Minus Occidental’s big splash, last year saw only $39 billion in deals, about one-half of the average $78 billion for annual domestic oil and gas M&A in the decade, one in which transactions for shale and tight assets surged.

“Investors who funded the shale revolution over the last decade have become vocal in advocating for payouts and cut back on providing new capital,” said Enverus’ Andrew Dittmar, senior M&A analyst. “That flowed through to limited M&A and a negative reaction to deals for much of the year.

“However, we saw an uptick in December in the pace of deals and more positive investor reactions to acquisitions. That should bode well for M&A in 2020.”

M&A played a key role in the past 10 years to bring the focus to the Lower 48’s oil and natural gas potential, with $567 billion overall spent on shale/tight properties, or 73% of the total.

Exploration and production (E&P) companies then poured more capital into funding development, as they moved their focus from natural gas-rich properties and into the more cash-rich oil formations, particularly the Bakken and Eagle Ford shales and the king of all plays, the Permian Basin.

However, the available capital that made the United States the envy of the global oil and gas world receded in 2019, minus the Occidental mega deal.

Occidental’s acquisition of Anadarko highlighted 2019’s consolidation in the Lower 48, and the transaction was within the “ballpark” of ExxonMobil’s $41 billion deal announced in late 2009 for XTO Energy Inc. as the most ever spent in the U.S. onshore.

XTO, as one of the largest Lower 48 leaseholders at the time, gave ExxonMobil entry into unconventional activity with a bevy of prospects and initially boosted output by 12%. ExxonMobil now is the largest player in the Permian.

Although Anadarko was a global oil and gas player, Occidental keyed its takeover to the Lower 48, noting that most of the value was seen from assets in the Permian and Denver-Julesburg basins.

Beyond the Occidental transaction last year, most of the other marquee deals in 2019 also were Permian-related, led by Callon Petroleum Co.’s merger with Carrizo Oil & Gas Inc., initially valued at $3.2 billion, and WPX Energy Inc.’s $2.5 billion takeover of privately held Felix Energy II. Also securing a top notch deal was the all-stock merger between Permian players Parsley Energy Inc. and Jagged Peak Energy Inc., valued at around $2.27 billion.

WPX’s $2.5 billion acquisition of EnCap Investments LP-funded Felix in December was notable for several reasons, according to Enverus.

“Besides being the largest deal of 4Q2019 and fourth largest deal of 2019, the acquisition of a premier private equity position in the Permian shows there are still exits available for the ”built to sell’ model of private equity portfolio companies. WPX also outperformed the broader markets on news of the deal, compared to most buyers being sold off on news of M&A.”

The Permian remains far and away the key driver in domestic oil growth, and it remains the star in U.S. energy M&A. The Texas-New Mexico formation alone accounted for more than 60% of 4Q2019 value, even as commodity prices have wobbled.

“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,” Enverus researchers said.

Smaller E&Ps in the last half of 2019 were showing an “increasing willingness” to accept lower buyouts, with capital markets constrained and financing options narrowed. Operators that are less capitalized and short of self funding or generating positive free cash flow (FCF) may have limited options to avoid debt and restructuring issues.

Besides selling assets at a discount, some junior E&Ps have turned to private capital as an alternative.

“Challenges for one company can mean opportunity for someone else and we’re seeing that on the private capital side,” said Enverus market research director John Spears. “During the exploratory and high growth years of shale, private equity was funding companies to drill and flip acreage.

“Today, private equity is providing a secondary source of capital to companies that need to grow but don’t have the financial means via joint ventures, drillcos, purchasing overriding royalties and other arrangements.”

Tight financing options for potential sellers could lead to an M&A surge in 2020. The outlook for would-be buyers is more positive.

“After a year of cutting costs and focusing on efficiencies, larger companies look ready to turn the corner on free cash flow and are instituting dividends and share buybacks to reward investors,” Enverus researchers noted. “Their stock prices are also on the rise, aided by a combination of their own operational improvements and tailwinds from an improving global economic picture and rising oil prices.”

As investors become more confident in a company’s ability to deliver on FCF, they may be more open to acquisitions at a reasonable price and particularly if the asset quality is high.

“In addition, larger E&Ps should be better positioned to deliver on returns to investors by leveraging economies of scale, more efficient development and more favorable service and midstream contracts.”

More consolidation in the Lower 48 is likely going to take the form of acquisitions by multi-national players or mergers between junior-to-midsize players, as was the case in 2019.

“In the last 10 years, we watched U.S. shale upend global energy markets and transform the U.S. into a net energy exporter,” Dittmar said. “We’re now at an inflection point where shale matures from a growth industry to one that generates dividends and share buybacks for its investors.

“Completing that transition and setting the stage for the next 10 years will likely require a round of consolidation, and 2020 sets up the needed pieces for this to occur.”