The Permian Basin and natural gas-rich Haynesville Shale accounted for nearly all of the upstream transactions in the final three months of 2021, but dealmaking overall was down sharply from the third quarter, Enverus reported.

top 5 deals

The value of Lower 48 merger and acquisition (M&A) activity between exploration and production (E&P) companies totaled $9 billion in 4Q2021, versus $18.5 billion in 3Q2021, the energy data analytics firm said. 

For the full year, M&A values reached $66 billion, 25% higher than in 2020, when oil and gas deal values were pummeled by Covid 19. The annual total for 2021 was below the $72 billion average fetched between 2015 and 2019, before the pandemic.

“Since the emergence of Covid, upstream M&A has been characterized by fewer, but larger, deals,” said Enverus director Andrew Dittmar. “During 2020, that took the form of public companies consolidating amongst themselves…” 

Last year, the focus centered on “rolling up private E&Ps. But the volume of deals remained depressed, with 172 and 179 transactions in 2020 and 2021, respectively, versus an average of nearly 400 deals per year before Covid.”

Big Deals

The No. 1 deal in the quarter was by Oklahoma City-based Continental Resources Inc. The E&P, long focused in the Midcontinent, entered the Permian with a $3.25 billion acquisition from Pioneer Natural Resources Co. 

At No. 2 was Southwestern Energy Co., which agreed to pay $1.85 billion to buy GEP Haynesville, which was the third largest private equity (PE) explorer in the Haynesville and Middle Bossier formations. In at third was Earthstone Energy Inc., which in December paid $604 million for PE-backed Chisholm Energy Holdings LLC for assets in the Permian’s Delaware sub- basin.

The fourth biggest deal in the fourth quarter was by Paloma Resources LLC, an affiliate of PE giant EnCap Investments, which last month took Haynesville-focused Goodrich Petroleum Corp. private in a deal valued at around $480 million. Rounding out the top five was a $419 million deal by Diversified Energy Co. plc, which expanded into the Midcontinent by acquiring Oklahoma assets from PE-sponsored Tapstone Energy Holdings LLC.

The Permian Delaware and Haynesville, researchers noted, were the two most active plays of 4Q2021 and combined to account for 80% of the quarter’s transaction value.

“Buyers have been largely focused on adding high quality inventory to build out their runway and sustain the strong cash flow generation recently achieved,” Dittmar said. 

“The largest supply of inventory meeting buyers’ criteria is available for sale in the Delaware for oil and the Haynesville for gas. That is largely because both these plays had significant private investment in prior years that the sponsors are now looking to monetize via sales to a public company.”

[Can Natural Gas Carry the Post-Coal Electricity Market? Join NGI’s Senior Energy Analyst Shaylon Stolk as she analyzes what Europe’s 2022 energy crisis can teach us about the post-coal power market and what this could mean for the future of natural gas. Listen now.]

Is A Resurgence in M&A Expected in 2022?

Buying private E&Ps is not the only way to secure inventory in the basins, Enverus noted. Many public E&Ps sell noncore assets following big takeovers, as Pioneer has done following its $7.6 million merger in early 2021 with Parsley Energy Inc.

“Big-time corporate M&A often leads to a subsequent wave of asset deals as buyers prune their expanded portfolios,” said Dittmar. “There was a bit of this during 2021 with noncore asset sales by Pioneer and Diamondback Energy Inc., another buyer from the 2020 merger wave. There should still be plenty of room to run for deals though and we anticipate this to drive a resurgence in mid-size, asset-level deal making.”

Public E&Ps were the top asset buyers in 2021, but PE companies remain the upstream space “and in some cases, are reloading their portfolios.”

Other PE-backed E&Ps working in the Permian, including Colgate Energy Partners III LLC and Ameredev II, “have used M&A to build scale toward a size that would allow them to test the waters” for an initial public offering (IPO). The E&Ps use “third-party M&A and combinations within their own sponsors’ portfolio of companies, sometimes termed a ‘smashco’ deal within the industry,” according to Enverus researchers. 

“The IPO market has been substantively closed to traditional E&Ps for several years now, with just one notable offering since 2017,” Dittmar noted.

Haynesville-focused Vine Energy Inc. “only lasted six months as a publicly traded company before exiting in mid-2021 via a sale to Chesapeake Energy Corp.

“A couple companies now look likely to again test whether newfound investor enthusiasm for the space translates into a willingness to support IPOs. That should be one of the more interesting stories to follow in 2022,” Dittmar said.

The M&A market is resetting for an active year, according to Enverus.

“Pricing on inventory in areas like the Delaware Basin and Haynesville is still attractive for buyers, and additional assets should be available on the market.”

Worthwhile oil and gas inventory also remains in other plays that include the Permian’s Midland sub-basin West Texas and the northeastern part of the Marcellus Shale. In the more developed regions that include the Bakken and Eagle Ford shales, “substantial high production assets are likely to be placed on the market and may be available at attractive prices drawing a mix of public and private buyers.:

Stronger deal flow could “smooth the boom-or-bust cycle of M&A that has characterized the two years since the emergence of Covid,” Enverus noted. “However, there may be fewer multi-billion deals to buy public or private companies as so many of those deals have already transacted and strong commodity prices lessen the pressure on smaller companies to sell.”