Deep Dive Into The US M&A Market
Published 1st September 2021
by David Stent, Content Manager, Energy Council
The US market has been awash with deals since late 2020, when a market consolidation saw five deals surpass $40 billion – with the Chevron/Noble acquisition ($13bn) and the ConocoPhillip/Concho purchase ($9.7bn) being the pick of the lot. These deals were a reflection of the market vulnerabilities as companies with strong assets but low cash-flows had to accept offers from entities less affected by the price shocks.
Moving into 2021, the North American market maintained their position as ‘most active region’, in terms of both the quantity of deals and the total transaction values – leading to a total of 21 deals to the value of $12.72bn being confirmed in Q1/2021.The North American oil and gas market has seen a stabilization of asset valuations as oil and gas prices continue to arc toward pre-2020 levels.
Since ERCE released their Q1/2021 M&A tracker, a further 21 deals to the value of $21.1bn have been processed in the North American market, indicating that the shale patch is beginning to undergo another round of consolidation. The Energy Council has taken a look at some highlights of US M&A activity so far this year…
Pioneer Natural Resources and DoublePoint Energy ($6.4bn) was the stand-out deal of Q1 in 2021, as Pioneer acquired DoublePoint in a cash-and-stock deal that comprised of $1bn in cash, $0.9bn in debt and a further 27.2 million shares of Pioneer stock.
Pioneer will take ownership of “a contiguous position of 97,000 core Midland basin net acres directly offsetting and overlapping Pioneer’s existing footprint”, assets that are expected to add 100,000 boe/d this quarter. The deal will be structured with Pioneer shareholders owning 89% of the new combined company, with DoublePoint’s shareholders owning the other 11%.
ARC Resources and Seven Generations Energy ($2.13bn) agreed a merger in April that will see the two pure-play Motney producers join forces to have a combined all-share transaction value of C$8.1bn. The company became the 6th largest Canadian energy company, with a portfolio of low-cost natural gas and high-margin condensate assets that will now have a production output of over 340,000 boe/d.
Under the terms of the definitive agreement, Seven Generations shareholders will receive 1.108 common shares of ARC for each common share of Seven Generations held. ARC Resources and Seven Generations Energy announced a combination in an all share transaction valued to formed a combined company value of CAD$8.1bn. Seven Generations is valued at CAD$2.74bn in the deal.
Cabot Oil & Gas and Cimarex Energy ($7.4bn) is the biggest deal this quarter, the all-stock merger will see “Cimarex Energy shareholders receive 4.0146 shares of Cabot common stock for each share of Cimarex common stock owned”. While the ‘implied equity value’ of the deal is worth $7.4 billion, according to Cabot, the new combined ‘enterprise value’ is worth $17 billion in late May after the merger was announced earlier in May.
Some sceptics have questioned the rationale behind the deal, surprised that Cimarex chose “geographic and commodity diversification” rather than consolidation. Both parties had been expected to seek deals within their traditional domains of oil (for Cimarex in the Permian and Anandarko Basins) or gas (for Cabot in the Pennsylvania shale patch).
EQT Corporation and Alta Resources Development ($2.925bn) have engaged in a cash-and-stock deal, in which EQT Corporation has acquired the Northeast Marcellus shale assets from Alta Resources Development in a deal worth just over $2.9 billion. EQT now holds 300,000 acres in the Marcellus, of which there are 220,000 net acres of operated positions, providing 1.0bcfe of high-margin net production dry gas. EQT CEO and President, Toby Rice, believes that, “it will bolster our free cash flow profile by adding approximately $300-400 million of annual free cash flow and a total of approximately $2.0 billion of free cash flow through 2026, an improvement of approximately 55% compared to our pre-transaction outlook.”
The deal represents yet another win for Alta Resources Development, the fourth time the company has sold acreage positions for over $500 million. For EQT it represents another successful buy-out since Rice’s appointment as CEO in 2019, and while debt sits at $5 billion, the free cash flow delivered by the Alta purchase will now be upwards of $900 million.
Independence Energy and Contango Oil & Gas ($2.7bn) have agreed to merge in an all-stock transaction that will accrue a combined enterprise value of $5.7bn. The deal will cover assets across Eagle Ford, Rockies, Permian and Mid-Continent basins – with an expected 2022 production output of between 108-114 mboe/d. Shareholders of Independence will own approximately 76% of the new combined companies shares, with Contango’s shareholders owning the other 24%.
This deal represents another deal that will see further consolidation of US onshore assets, that Contango Chairman (and Chairman of the new combined group), John Goff, believes will, “provide substantial value accretion, significant scale and a lower cost of capital.” The intended result will be unleveraged free cash flow of between $375-400 million in 2022.
Civitas Resources and Crestone Peak Resources ($1.3bn) & Bonanza Creek Energy and Extraction Oil & Gas ($1.3bn) is one of the year’s more interesting deals that will see a complex exchange of equity interests.
Firstly, Bonanza Creek Energy is to merge with Extraction Oil & gas to create ‘Civitas Resources’, in a deal that will provide shareholders of each company with 50% of the new company’s shares – giving the new Civitas an “aggregate enterprise value of approximately $2.6bn”.
In its first actions, has agreed to swap a 100% equity interest in Crestone Peak Resources with Crestone shreholders, for 22.5MM shares in Bonanza Creek Energy. In effect, Bonanza shareholders will now own 37% of Civitas, while Crestone shareholders will own the about 26%.
$500 – $1 billion
Tourmaline Oil Corp and Black Swan Energy (C$1.1bn) is the biggest deal north of the border thus far this year, with Tourmaline acquiring Black Swan Energy for 26MM in shareholdings and assuming a further $350m in debt, taking the deal over the billion dollar mark.
The Canadian outfit has purchased “2P reserves of 491.9 million barrels of oil equivalent (boe), 1,600 Montney horizontal internally estimated drilling locations, and 230,000 net acres of Montney rights.” Montney sits in the Western Canadian Sedimentary Basin, an area the company expects to enjoy strong growth in the forseeable future. These assets will add approximately 175,000 bcoe/d to their output levels, taking the total up to 500,000 bcoe/d by mid-2022.
Laredo Petroleum and Sabalo Energy ($715m) have agreed a deal that will see Laredo Petroleum purchase the Permian Basin, Howard County assets of Sabalo Energy (a portfolio company of EnCap Investments) and an unnamed non-operating partner for “$625 million in cash and 2.5 million in common equity shares of Laredo”. The purchased site they believe to hold an estimated P2P reserves of 30 million boe, the 21,000 contiguous net acres, will add approximately 14,500 boe/d.
At the same time, Laredo has “partially divested of certain legacy gas-weighted proved developed producing reserves to an affiliate of Sixth Street Partners” in a sale that will provide Laredo with $405 million and “potential cash flow based earn-out payments over the next six years”.
“Laredo Petroleum agreed to acquire the assets of Sabalo Energy, a portfollio company of EnCap Investments and a nonoperating partner for approx. US$715MM, after closing price adjustments, comprised of US$625MM in cash and approx. 2.5mm shares of Laredo common equity.”
Colgate Energy Partners III and Occidental ($508m) have a finalised a sale of Occidental’s “non-strategic acreage in the Permian” to an affiliate of Colgate Energy Partners III. It is the first in a wave of expected sales by Occidental in an attempt to reduce their debt pressures.
This particular deal will see an additional 25,000 net acres in the Southern Delware sub-basin with approximately 10,000 boe/d production output added to Colgate’s portfolio. In total, Colgate will control roughly 85,000 net acres located in Reeves, Ward and Eddy counties and enjoy an estimated output of roughly 55,000 boe/d. Following Occidental’s ill-timed $38 billion deal for Anadarko Petroleum’s assets in 2019 and the subsequent pandemic-induced demand slump, Occidental has been keen to make inroads into their debt burden.
Looking Forward to 2022
As we look forward to 2022, it can be certain that the US oil and gas market will be rife with activity, both in the boardroom making deals and at the wells pumping oil and gas. The American position remains unwavering, broadly that the US position is to increase the volume of production. What we see is further market consolidation as companies with distressed assets seek sales to access free cash flows.