Upstream mergers and acquisitions (M&A) among U.S. oil and gas companies totaled more than $16 billion in transacted value during the third quarter, the highest quarterly tally so far this year, according to Enverus Intelligence Research (EIR).

Overall though, M&A activity has been sluggish, particularly in the Permian Basin, amid price volatility and undervaluation of exploration and production (E&P) company stocks, said EIR, a subsidiary of Enverus.

“While the business environment for E&Ps has been mostly great in 2022, that hasn’t translated to a bonanza of dealmaking,” said EIR director Andrew Dittmar. “Companies are using the cash generated by high commodity prices to pay down debt and reward shareholders rather than seeking out acquisitions. And when companies do make offers on assets, the bids are often disappointing to potential sellers.”

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Dittmar added, “To reach $16 billion of M&A value in 3Q2022 required not only a couple more typical operated shale deals, but also transactions like a public mineral company merger and the largest California deal in decades.” 

The largest deal of the quarter was EQT Corp.’s $5.2 billion purchase of THQ Appalachia I LLC (Tug Hill) and THQ-XcL Holdings I LLC from Quantum Energy Partners. 

“While the deal saw most of its value ascribed to existing production and midstream assets, it also included around 300 untapped drilling locations targeting the Marcellus and Utica” shales, said the EIR team.

Devon Energy Corp. followed a similar strategy with its $1.8 billion acquisition of Eagle Ford Shale pure-play Validus Energy. The purchase from Pontem Energy Capital was “mostly for the value of its current production while adding incremental inventory,” the EIR team said.

The Validus deal was the largest in the Eagle Ford since 2018. Like EQT’s purchase of Tug Hill, “yet another example of a private equity company finding an exit,” researchers said.

Dittmar said investors “still seem skeptical of public company M&A and are holding management to high standards on deals…Investors want acquisitions priced favorably relative to a buyer’s stock on key return metrics like free cash flow yield to give an immediate uplift to dividends and share buybacks.”

He added, “Given how cheaply public E&Ps are trading, it can be a tall order to strike deals that are even more favorably valued than a buyer’s stock. That also limits how much money a buyer can pay for undeveloped locations that may not generate a return until drilled years later.”

These concerns help explain the relative lack of deals struck in the Permian this year, according to EIR. 

Referring to the Permian, researchers said, “The usual workhorse of upstream M&A saw less than 10% of total deal value directed its way in transactions focused only on that basin, and the largest deal in the region was for a production-heavy Central Basin Platform asset with vertical drilling opportunities.”

Other major deals during the quarter included the nearly $4 billion sale of Aera Energy, a venerable California joint venture between Shell plc and ExxonMobil, to Germany’s IKAV. The third quarter also saw the nearly $2 billion acquisition of Brigham Minerals by Sitio Royalties.

The Sitio deal created the largest publicly traded mineral and royalty company in the United States. Sitio and Brigham “were poised to go head-to-head for the best M&A opportunities driving up prices,” Dittmar said. “Instead, they will now have the power of a larger platform in the competitive minerals space.”

Although concerns about a recession and cost inflation could continue to hinder dealmaking, “Permian M&A likely won’t stay down for long given how important that basin is to the overall industry and U.S. supply,” said Dittmar.

He cited Diamondback Energy Corp.’s $1.6 billion cash-and-stock purchase of FireBird Energy LLC as a possible harbinger of things to come. “That could very well set off a chain reaction of Permian deals waiting in the wings.”