Energy producers put cash to work in M&A

Mergers and acquisitions in the oil and gas industry have maintained momentum through tumultuous markets in 2022, amid industry consolidation and an abundance of cash from sky-high energy prices.

Much of the deal activity is being driven by strategic acquirers who are concentrating their position, giving private equity firms a chance to cash out on their fossil fuel holdings.

The total value of pending and completed energy deals reached $170.9 billion, according to PitchBook data through mid-June, up around 11% from the same period a year ago. The sector is on pace to eclipse the full-year tally of 2021, when companies and investors signed a total of $295 billion worth of deals. M&A volume, however, declined nearly 35% to 411 deals.

The exploration, production and refining segment was the biggest driver of M&A in the space, representing around 57% of the broader industry's deal value, or $98 billion.

Concentrating power

Industry consolidation among oil and gas producers is one factor driving the momentum in energy dealmaking, said PwC energy analyst Seenu Akunuri.

Australian energy giant Woodside Energy Group's tie-up with BHP's petroleum portfolio has so far been the year's largest deal, valued at around $40 billion. Other large transactions include Norwegian company Aker BP's $14 billion takeover of Sweden's Lundin Energy. The cross-border merger will create Norway's second largest oil and gas producer, only behind state-controlled energy explorer Equinor.

Midland, Texas-based energy explorer Colgate Energy Partners III agreed this year to combine with shale driller Centennial Resources to form a $7 billion oil and gas producer focused on the Delaware Basin. The planned merger quashed rumors that Colgate was seeking an IPO.

Meanwhile, several midsize players are pursuing acquisitions to increase production capacity on the sharp rise in energy prices, giving large producers and investors a chance to divest fossil-fuel assets, Akunuri said.

In one recent example, Canadian conventional and shale driller Whitecap Resources struck a deal to purchase Exxon Mobil's Canadian shale business in an all-cash transaction valued at about C$1.9 billion (about $1.5 billion), which will increase Whitecap's condensate and natural gas exposure. The announcement came shortly after the energy explorer reported record first-quarter earnings and disclosed its plan to boost natural gas production to capitalize on a surge in commodity prices.

"We are seeing a higher portion of cash being offered in recent deals, as opposed to the past when you see more all-stock deals," Akunuri said. "Energy producers have a lot more cash now. … If they are not using that cash to issue dividends or pay off debt, they are using it to pay for deals."

This year's numbers have carried momentum from last year, when M&A activity bounced back to pre-pandemic levels. Some of the largest deals completed in recent months started negotiations last year.

It remains to be seen whether the sector's strong appetite for deals will continue.

Either a decline in energy prices or a cooldown in demand could affect energy companies' incentive to expand production and deal activity, Akunuri said.

Offloading oil assets

The strong dealmaking trend has created opportunities for investors to cash in on their aging fossil fuel assets.

Blackston and Blue Water Energy sold North Sea oil and gas producer Siccar Point Energy this year to Ithaca Energy, which offered to buy the company for up to roughly $1.5 billion. Siccar's PE owners had been exploring a sale of the company in recent years, but talks with suitors—including Chrysaor and Equinor ASA—fell apart over price disagreements, Reuters reported.

Warburg Pincus also cashed out of one of its energy investments in recent months. Its portfolio company Siccar Point Energy sold its leasehold interest and related assets in the Williston Basin to Devon Energy for $865 million.

PE exit activity rose sharply since Q2 2021, with investors agreeing on $37 billion worth of transactions since then, including $13.2 billion worth of transactions this year, according to energy-focused consulting firm Enverus. This works out to an average of $7 billion in PE sales every quarter in that timeframe, compared with an average of $2 billion in quarterly PE sales from 2018 to 2020.

Among all completed PE-backed exits this year, trade sales—in which a PE investor sells its stake to a strategic acquirer—contributed to more than half of the total deal value, PitchBook data shows.

"Private equity was a major investor in oil and gas through the early shale boom (pre-2014) and the lean years of 2014 to 2021," Andrew Dittmar told PitchBook. "With prices trending back up, they see an ideal window to cash out these investments and realize returns."

To learn how the current trends in O&G impact and benefit your company, call or email me now to receive 3 hours of free consultative analysis. Our analysis offers clarity, based on your objectives, if a full or partial exit, recapitalization, divestiture, acquisition or pre-sale exit strategy provides the greatest benefit to you and your company.

Vercor has been delivering M&A expertise for over 25 years. We serve as a trusted partner to help build long term, iterative strategies that ensure you are positioned to meet your unique personal and financial goals whether it is selling, recapitalizing, acquiring or divesting of a division. Given the shifts in the climate above, now is the time to evaluate, strengthen, and increase the market value of your company regardless of your timeframe.

Todd Cummiskey

Vercor

704-926-6564

ToddC@Vercor.com