Rick Muncrief, chief executive officer and president of Devon Energy Corp., during an interview in … [+]
Mergers and acquisition (M&A) activity in the upstream segment of the US oil and gas industry slowed to a trickle during the third quarter of 2024, per a new report from Enverus Intelligence Research (EIR), a subsidiary of energy analytics firm Enverus. The aggregate value of the five largest M&A deals tracked by EIR came to just $12 billion, marking the slowest quarter in recent years.
“Upstream M&A was bound to drop after the unprecedented lift of corporate mergers and private equity exits since 2023. Those deals raised asset prices and cut the number of potential targets,” said Andrew Dittmar, principal analyst at EIR. “An additional factor could have been increased volatility in crude prices during the third quarter. Any time commodities get more volatile, oil and gas deals are harder to negotiate. However, that is a short-term turbulence until buyers and sellers feel more confident on the direction oil prices are moving.”
One of the factors cited by Dittmar for the low dollar value of Q3 deals is the lack of a single merger of two publicly-traded companies, a phenomenon not seen since the third quarter of 2022. It’s a trend Dittmar foresaw in July after the flurry of big public deals seen during 2023 and the first half of 2024, including the deal involving ExxonMobil and Pioneer Natural Resources and Chevron’s buyout of Hess Corp.
While that wave of upstream consolidation leaves fewer public targets standing, Dittmar says more deals remain to be made. “While corporate M&A has slowed, the industry is not done consolidating,” he says, adding, “the path to get there may be a bit bumpier from this point. The most obvious deals in terms of a good strategic fit between assets and a ready seller got done earlier in the consolidation cycle. Buyers may need to offer higher premiums than the average 15% paid to selling companies so far to tempt some of these remaining companies into a deal. However, that needs to be balanced against not overpaying and still striking a deal that also makes sense for the acquirer.”
With some of the big corporate deals having recently closed – or, as in the case of Chevron and Hess, remaining to be finalized – the coming months are likely to be dominated by asset sales by the surviving companies looking to high-grade their portfolios. A good example came when Occidental sold off part of its recent acquisition of CrownRock to Permian Resources for $818 million.
Dittmar also points out that a good number of privately held and private equity targets remain for future consolidation. This is especially true outside of the Permian Basin, in secondary play areas like the Williston Basin, where Devon Energy had the biggest deal during Q3 with its $5 billion buyout of Encap-funded Grayson Mill Energy. The lower dollar cost per acre for deals in basins like the Williston, the DJ Basin, and the Eagle Ford Shale enable acquiring companies to obtain bigger acreage positions with more future drilling locations for the same price.
“Ideally in a transaction, the buyer wants to improve the overall quality of their inventory portfolio and lengthen the years of total inventory they have to drill,” said Dittmar. “However, with the remaining opportunities that is going to be challenging to do at a reasonable price. Instead, you are going to see buyers pick up bigger chunks of middle-quality inventory or buy small pieces of high-quality drilling opportunities that go right to the front of the line for development. That is what Vital Energy did with its acquisition of Point Energy in the Delaware Basin. The deal added locations that are competitive with the best inventory Vital has left to drill, even if there wasn’t that much total inventory associated with the asset.”
The Bottom Line
With most of the big fish of US shale having now been gobbled up by larger predators, the main motivation behind future consolidation will focus on acquiring high numbers of future quality drilling locations to extend the life of the buyers. Where the wave of consolidation the shale space going all the way back to 2018 has focused on buying up the highest quality acreage available in terms of future productivity, companies will now focus on obtaining drilling locations that are competitive with current inventories for future capital allocations.
This is a natural progression of moving out of the drilling boom times and into the development phases of these big shale regions. It is nothing more or less than the normal course of business.
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