A pump jack operates on April 23, 2020 Eddy County, New Mexico. (Photo by Paul Ratje / AFP) (Photo ... [+] by PAUL RATJE/AFP via Getty Images)
A new mergers and acquisitions report from analyst firm Enverus projects that the hot M&A market the oil and gas industry experienced during the second half of 2020 will continue into 2021 but then slow considerably as the year progresses. The ability to use such deals to drive down costs and increase efficiencies through economies of scale is especially attractive to investors, as is the recent focus of acquiring companies on increasing their respective footprint in the oil-rich Permian Basin.
Indeed, Enverus’s report finds that the greater Permian Region - including the Midland Basin to the east and Delaware Basin to the west - accounted for fully 83% of the value of deals made during the fourth quarter. That is hardly surprising given that the Permian has consistently been home to roughly half of all the nation’s active drilling rigs for almost a decade now. With natural gas prices remaining stuck in a narrow, low trading range, the focus remains on crude oil and other liquids, and the Permian is the most liquids-rich region in North America.
“Wall Street appears supportive of E&P deals, but with very specific expectations on deal structure and the quality of the merger target,” said Andrew Dittmar, M&A Analyst for Enverus. “The limiting factor for consolidation in 2021 will be the number of attractive merger partners left at the end of a very active year.”
That last comment by Dittmar raises a very interesting point: After all of the Permian-focused activity during the second half of the year, who are the big takeover targets that remain standing? Taking that question back to 2019, Anadarko is gone to Oxy, Noble Energy
Top 5 Upstream Deals, Q4 2020
As a result of that reality, combined with ongoing uncertainties centering around the COVID-19 pandemic and resultant government policy responses to it, Enverus sees a substantial slowing in the oil and gas M&A space for 2021 as it applies to the very large deals we saw during the second half of 2020. But that doesn’t mean it will all grind to a halt.
Enverus pointed to that likelihood in a note summarizing its report: “Corporate consolidation is likely to continue as companies look for synergies to drive down their cost structures. That is particularly true among the industry’s small and midsize participants, which are urgently in need of scale. Companies that went through a Chapter 11 restructuring in 2020 could emerge as potential merger partners now that debt loads are rightsized. However, there may be fewer very large corporate deals because so many of those were accomplished during the last year, winnowing the list of possible participants.”
It seems likely that the focus of acquisition activity by the bigger players during 2021 could center on the small and midsize upstream companies noted by Enverus, especially those exiting Chapter 11 with newly-lowered debt loads. There is also the potential that newly-enlarged Diamondback Energy
The bottom line in the current market conditions seems to be that, in the upstream business at least, getting bigger means getting better, especially when you are getting bigger with Permian assets.