Enverus: Upstream M&A Cools in First Quarter 2023
Eagle Ford sees ‘surprising resurgence’ as buyers look to secure the play’s mature assets.
The first quarter of 2023 showed that buyer interest remained high in the new year for the Eagle Ford shale of south Texas, according to a recent report by Calgary-based analytics firm Enverus Intelligence Research.
US upstream mergers and acquisitions (M&A) deals reached $8.6 billion in transacted value in the quarter in 16 deals. The Eagle Ford saw over $5 billion in deal activity for what Enverus called a “surprising resurgence in the mature play.”
Overall, deal value was down more than 20% vs. the first-quarter average since 2016 and continued its multiyear collapse with a disclosed value of 80% less than the first-quarter average, Enverus reported.
Stitching the Fragments Together
However, Andrew Dittmar, director at Enverus Intelligence Research, noted that the quarter was an outlier regarding deal targets and types of upstream transactions.
“Rather than public E&Ps focusing on buying undeveloped inventory in the Permian Basin from private companies, most of the deals targeted mature assets in the Eagle Ford and included more public-to-private transactions plus a corporate merger,” Dittmar said.
The largest acquisition of the quarter was Calgary-based Baytex Energy’s purchase of Eagle Ford pure-play producer Ranger Oil for $2.5 billion. The transaction brought Baytex into the Eagle Ford and added 162,000 net acres in the Eagle Ford’s crude oil window, the company said.
UK-based INEOS also debuted in the North American shale by purchasing Chesapeake Energy’s assets in the Eagle Ford for $1.4 billion.
“The Eagle Ford lacks home-grown consolidators and has remained fragmented,” added Dittmar. “Over the years, it has also been a reliable target for buyers from outside the US, drawn by its established production and ease of access to Gulf Coast markets. That is continuing with a modest gas acquisition by Mitsui already in April. We view the Eagle Ford as an optimal place to buy production-heavy assets and some inventory. Still, it is generally not the ideal play for companies needing a big chunk of undeveloped acreage to be looking.”
The prolific Permian Basin of west Texas and southeast New Mexico continues to draw buyers looking for large tracts of undeveloped land to expand their operational footprint.
Mid-size shale player Matador Resources’ acquisition of EnCap Investment’s Advance Energy Partners for $1.6 billion in cash in January added more than 18,000 net acres of leases in the northern Delaware Basin to its portfolio.
Dittmar said that the deal is part of a rush of private equity (PE) exits, with EnCap among the most active sellers. That includes the early April divestment of three EnCap portfolio companies in the Midland Basin to Ovintiv for more than $4 billion.
“Most public companies are in need of inventory, and the land held by private E&Ps is where they can find it,” he said. “However, adding these locations comes at an increasing cost. Top-tier locations in the Permian nearly always garner more than $2 million each, and some deals have approached the $3 million per location mark. We anticipate core locations will break the $3 million mark this year as the inventory situation for operators isn’t getting any better.”
Dittmar noted that the recent major Permian deals have gone to large operators but that Matador, a sizable company with a market cap of nearly $6 billion, is among the smaller buyers.
“These companies have the cash and favorable stock valuations to afford higher-priced acreage. However, many smaller companies are in even more need of extending drilling inventory to satisfy investors. It’s a catch-22,” Dittmar said. “Small operators need inventory to improve investor sentiment and get a higher multiple on their stock, but without the higher multiple, they really can’t afford these deals and keep them accretive to cash flow. The solution lies in targeting tier 2 and tier 3 M&A opportunities, plus smaller bolt-on transactions that tend to be cheaper.”
Searching for Noncore Assets
While public companies continue to shop for private E&P companies, remaining PE teams continue looking for noncore assets shed by public operators, according to Enverus.
Houston-based Wildfire Energy, backed by Warburg Pincus and Kayne Anderson, purchased Chesapeake Energy’s eastern Eagle Ford assets for $1.4 billion in January in what Dittmar cited as an example of PE teams buying outside of the crowded Permian Basin where rising prices are making it hard to compete.
“By contrast, assets in plays like the Eagle Ford and the Bakken can often be purchased for the value of existing production alone without having to pay anything for the acreage,” said Dittmar. “That was the case for the Wildfire deal, and in a purchase of Ovintiv’s Bakken assets by EnCap-sponsored Grayson Mill that coincided with EnCap’s Midland sale in early April.”
He concluded that while M&A may have slowed and shale “may be in its later innings, there are still opportunities to be had.
"The scramble for dwindling inventory is on, and oil prices are in a good place for M&A where both buyers and sellers feel comfortable transacting. Gas deals are likely to remain challenged as pricing is low and volatile, a murderous combination. However, gas may be poised to pick up the slack in the future when buyers start eyeing recovering prices driven by increasing US LNG exports and offer buyouts that are acceptable to sellers.”