The third quarter of 2022 showed that not all roads lead to the Permian Basin when it comes to mergers and acquisitions (M&A), according to a recent report by Calgary-based analytics firm Enverus Intelligence Research.
US upstream M&A deals reached more than $16 billion in transacted value in the quarter, the best showing of 2022, Enverus said, adding that it was achieved despite the oil and gas price volatility, lack of market recognition of E&P stocks, and a “surprising dearth of deals in the usually prolific Permian Basin. The $16 billion third quarter M&A is down from $18.6 billion in the same quarter a year ago.
Andrew Dittmar, director at Enverus Intelligence Research, noted that rather than seek out acquisitions, companies are using the cash generated by high commodity prices to pay down debt and reward shareholders.
“And when companies do make offers on assets, the bids are often disappointing to potential sellers. To reach $16 billion of M&A value in 3Q22 required not only a couple more typical operated shale deals, but also transactions like a public mineral company merger and the largest California deal in decades,” he said.
Top Five Upstream Deals of the Third Quarter 2022
| Date | Buyers | Sellers | Region | Value ($MM) |
| 09/06/22 | EQT | Tug Hill; XcL | Appalachia | $5,200.40 |
| 09/01/22 | IKAV | Shell; ExxonMobil | California | $3,861 |
| 09/06/22 | Sitio Royalties | Brigham Minerals | Multiple | $1,918.48 |
| 08/09/22 | Devon Energy | Validus Energy | Eagle Ford | $1,800 |
| 09/22/22 | Talos Energy | EnVen Energy | Gulf of Mexico | $1,089 |
Source: Enverus M&A Analytics
The largest acquisition of the quarter was US independent EQT’s purchase of West Virginia producer Tug Hill and associated XcL Midstream, both backed by Quantum Energy Partners, for $5.2 billion. In addition to picking up existing production and midstream assets, EQT with the transaction picked up around 300 untapped drilling locations in the Marcellus and Utica shale plays.
EQT’s purchase of Tug Hill and XcLMidstream is the largest Appalachian deal since its $6.7 billion acquisition of Rice Energy in 2017, helping to drive M&A in the Eastern region to a 5-year high, according to Enverus.
Devon Energy’s acquisition of the Pontem Energy Capital’s Validus Energy for $1.8 billion was the largest in the Eagle Ford play since 2018.
According to Enverus, the purchase, along with the Tug Hill deal, is yet another example of a private-equity company finding an exit. Both EQT and Devon purchased production-centric deals delivering free cash flow yields of around 30%, making the transactions immediately accretive to their distribution programs.
“Investors still seem skeptical of public company M&A and are holding management to high standards on deals. Investors want acquisitions priced favorably relative to a buyer’s stock on key return metrics like free cash flow yield to give an immediate uplift to dividends and share buybacks,” said Dittmar.
“Given how cheaply public E&Ps are trading, it can be a tall order to strike deals that are even more favorably valued than a buyer’s stock. That also limits how much money a buyer can pay for undeveloped locations that may not generate a return until drilled years later.”
A major contributor to the $16 billion of third-quarter M&A was even further from the usual flow of upstream deals in one of the most mature and regulatory- challenging oil regions of the country.
The first merger between public mineral and royalty companies rounds out the third-quarter deals.The nearly $2 billion acquisition of Brigham Minerals by Sitio Royalties unites two companies with similar market positioning, outlooks, and valuations that were positioned to be rivals.
“These two companies were poised to go head-to-head for the best M&A opportunities driving up prices,” noted Dittmar. “Instead, they will now have the power of a larger platform in the competitive minerals space.”
Going forward, challenges remain in the market including negative investor sentiment, growing recessionary risks, and concerns about cost inflation. Additionally, the less common M&A deals like California transactions or mineral mergers may not necessarily be repeated.
Permian M&A likely won’t stay down for long given how important that basin is to the overall industry and US supply. Just a couple weeks into Q4, the Permian logjam has already been broken by Diamondback Energy’s $1.6 billion purchase of Firebird Energy. That could very well set off a chain reaction of Permian deals waiting in the wings.
“There are some reasons to be positive on upstream M&A though,” concluded Dittmar.
“Despite rising costs, E&Ps are still generating a lot of cash and some companies may decide to direct portions of that toward M&A. Additionally, OPEC looks willing to reinsert itself into oil markets, which could bring stability and help buyers and sellers come together on pricing.
“Most helpful though would be for E&P equities to gain ground with investors. That would give management more breathing room to negotiate with private sellers on price, particularly for future inventory. Unfortunately, that may still take some time.”
