After a cold start to the year, North American upstream merger and acquisition (M&A) activity heated up in the second quarter, with U.S. dealmaking alone hitting more than 40 deals valued at around $33 billion.

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Energy data analytics expert Enverus on Monday issued its 2Q2021 report on U.S. exploration and production (E&P) activity. Finbrook Pte Ltd. also weighed in with its global M&A report for the second quarter, which included U.S. and Canadian transactions. 

Seven U.S. E&P transactions announced in the quarter were worth more than $1 billion, “the highest quarterly value total since 2Q2019,” according to Enverus. The number of transactions was tied for the most announced deals valued above $1 billion since 2014.

“Responding to investor pressure to operate more efficiently, E&P companies have prioritized consolidation,” said Enverus’ Andrew Dittmar, senior M&A analyst. “With three extremely active quarters out of the last four, there has been more than $85 billion announced in upstream M&A during the prior 12 months.”

During 2Q2021, the U.S. acquisition targets “showed a significant shift from last year,” Enberus research indicated. Last year, consolidation between the public E&Ps was driven by “operational and general and administrative synergies.” 

This year to date, only two public E&P tie-ups have been above $1 billion. 

Denver-Julesburg (DJ) Basin expert Bonanza Creek Energy Inc. in May agreed to spend $1.4 billion to merge with fellow Colorado E&P Extraction Oil & Gas. That merger, which would create Civitas Resources Inc. once completed, in June said it was looking to expand its DJ operations even further. 

Another $1 billion-plus merger was announced between Cimarex Energy Co., which works in the Permian Basin and Midcontinent, and Appalachian pure-play Cabot Oil & Gas Corp. The deal is valued at $9.3 billion.

“Of those two, only the Bonanza Creek/Extraction deal had operational synergies,” Enverus researchers noted. Instead, the public E&Ps have begun acquiring producers that are either private and sponsored by private equity (PE).

Private Practice

For example, Permian pure-play Pioneer Natural Resources Co. is paying an estimated $6.4 billion to purchase fellow Permian E&P and private DoublePoint Energy LLC. Southwestern Energy Co. is entering the gassy Haynesville Shale via a $3 billion takeover of private E&P, Indigo Natural Resources LLC. 

In addition, the largest natural gas E&P in the country, EQT Corp., is buying Alta Resources Development LLC, a Marcellus Shale-focused private company, for $2.9 billion.

“The uptick in acquisition activity targeting private equity backed E&Ps is likely a welcome relief for sponsors that were challenged to find exit opportunities over the last few years,” Dittmar said. “The deals targeting private E&Ps are less about cost-cutting synergies and more about adding inventory. 

“That can be in a buyer’s home basin, like Pioneer/DoublePoint, or entering a new area as Southwestern did by acquiring Indigo in the Haynesville Shale.”

According to Enverus, PE sponsors mostly receive buyers’ equity in the sales, with stock constituting around 70% of the value paid, while assuming cash-plus-debt is around 30% of the sales. In previous years, private sellers primarily took cash, researchers noted.

“Following a rally in equities that raised the valuation for public E&Ps, their stock represents an attractive currency to buy private and PE-backed counterparts,” Dittmar said. “For the sellers, stock gives them upside exposure plus the flexibility to monetize into cash once lock-ups expire and when the market is favorable.”

Not all PE sponsors view public markets as an exit, though. 

Enverus pointed to KKR’s Energy Real Assets team, which formed Independence Energy LLC, which agreed in June to combine with Contango Oil & Gas Co. The stake in the combined company was valued at $4.5 billion and was considered “an opportunity to grow their business as a public company via deals.”

PE-sponsored E&Ps are still looking to exit, while public E&Ps continue selling assets, which means “further acquisition opportunities should abound,” according to Enverus. “Public companies will likely target the Permian to add oil-weighted inventory and possibly the Haynesville to add gas inventory.”

“For more mature assets,” said researchers, companies might focus on the Eagle Ford or Bakken shales.

As if on cue, Eagle Ford pure-play Penn Virginia Corp. on Monday agreed to buy Lonestar Resources US Inc. to complement its South Texas portfolio. The transaction is valued at $370 million.

“As long as there isn’t a sharp retreat in commodity prices, M&A activity is likely to remain strong during the second half of 2021,” Dittmar said. “There are numerous opportunities for further acquisitions of private E&Ps or noncore assets.

“The public company consolidation story is also not finished, although its pace has slowed. But we may not see another quarter with $30 billion or more in M&A this year simply because so many of the marquee public and private deals have been accomplished during the last 12 months.”

Finbrook in its review of second quarter U.S. activity noted that the Cimarex/Cabot tie-up accounted for 40% of the aggregate transaction value for all the domestic transactions that it tracked. Researchers also expect the U.S. upstream M&A deal pipeline “to remain strong going into the third quarter, driven by the continued rise in oil prices.”

Canada Buying Spree

Excess liquidity for some of the cash-rich E&Ps should result in more transactions “as several U.S. majors continue to shed exploration and appraisal assets, and re-align upstream portfolios to focus on low-cost production and projects already under development,” Finbrook researchers said.

International deal value across eight key regions amounted to only $4.6 billion during 2Q2021, according to Finbrook. For comparison, the three-year average for the second quarter is $10.9 billion. 

Canada led the way, however, with M&A transactions accounting for 55% of total deal value. According to Finbrook, the top deals in Canada were led by Calgary-based Tourmaline Oil Corp., which agreed to pay $949 million for Black Swan Energy Ltd. Tourmaline also made a $169 million deal for Saguaro Resources

Among the other top Canada deals during 2Q2021 was Tamarack Valley Energy’s $420 million agreement to buy Charlie Lake light oil producer Anegada Oil. Calgary’s Whitecap Resources Inc. slapped down nearly $239 million for Quantum Energy Partners’ Kicking Horse Oil & Gas Ltd.

Meanwhile, Topaz Energy Corp. paid $203 million for some of Tourmaline’s Canada assets. And Calgary’s Surge Energy Inc. agreed to a $129 million deal for Astra Oil Corp.’s Saskatchewan assets.

The international M&A pipeline through the rest of 2021 “is expected to gather pace, driven by majors seeking to rationalize their upstream portfolios in a vastly improved oil price and general macroeconomic environment,” said Finbrook researchers.

“Projects that had been on hold through the period of depressed oil prices in 2020 are likely to attract strong investor interest again as oil prices remain strong in the $70 to $75/bbl range.”