Merger and acquisition (M&A) activity among North American upstream oil and gas producers and midstream operators may have leveled off recently but is well ahead of its pace of a year ago, said Peter Hays, a Houston-based partner in M&A at the law firm of King & Spalding.
“Generally speaking, it seems a bit flat after picking up at the beginning of this year and toward the end of last year,” he said. “But still it’s easier than it was prior to that for about a year or so. I’d say on a scale of one to 10 it’s probably a four or five.”
What would it take to move the needle? “I think that if we were able to stick at about USD 60 for WTI for two months, we would be at a seven and still heading upward,” Hays said.
The M&A market got a substantial boost in late 2016 as oil prices not only rose but stabilized. “What was making things so difficult for a year or two was just the volatility,” Hays said. “It was hard to do a deal unless you did it very quickly.”
While some simple asset sales can be executed in 2 or 3 weeks, most deals involve preference rights and consents from partners that must clear before the transaction closes. Consequently, a typical deal may take about 2 months and complex deals can take longer, Hays said.
Family Businesses Cashing Out
As activity quickened late last year, EOG bought out New Mexico-based Yates Petroleum in a deal valued at USD 2.5 billion. Soon afterward in early 2017, ExxonMobil’s XTO unit acquired 275,000 acres in the west Texas Permian Basin from the Bass Brothers of Fort Worth in a USD 6.6-billion deal.
“Those two deals were very interesting in that long-term players, family-type businesses, cashed out to majors,” Hays said.
The EOG acquisition may have been especially significant for representing a move by a large company with extensive Texas holdings, including a position in the Delaware Basin of the Permian, into the New Mexico portion of the Delaware.
“Yates was kind of a historic New Mexico family firm,” Hays said. “So that acquisition was kind of a seismic shift in the industry there. A lot of the acreage in the state is owned by families or small-company operators. And I think a lot of them are starting to sell or at least team up with bigger companies to develop the acreage, which is probably a good idea with land prices being so high right now.”
Acreage Swaps
Among upstream players, especially in the Permian, one of the commonest strategies is acreage swapping, some of which is a secondary effect of earlier M&A deals.
“Operators want to block up or core up their acreage to be able to drill these super-long laterals,” Hays said. “Sometimes, after an acquisition, they find themselves with checkerboard-type acreage patterns that don’t work well for that kind of drilling. So they swap acreage with other companies.”
Acreage swapping sounds simple in concept but can bring complications. “People always have to be careful,” Hays said, “because when you get acreage from someone else, it could be dedicated to a different gatherer, for instance, and then you have two gatherers in your cored-up acreage. That’s an issue that people are dealing with.”
Midstream Deals
Hays noted the upturn in midstream M&A activity that has emerged since the end of last year.
“There is a lot of shaking out in the midstream—a lot of new project development and project funding that I’ve seen,” he said. “Companies are being funded by private equity to develop projects in the Permian Basin, which is a very high-activity area right now, although it seems to be slowing down from earlier this year.”
The growth of private equity investment is a notable development in oil and gas activity.
“They seem to have really set roots down in Houston,” Hays said. “They’ve set up teams here.” The step of locating in Houston has helped to allay industry fears that private equity players were only interested in profiting off of short-term volatility, he said.
“I think it’s similar to when a lot of law firms from other cities moved to Houston 4 or 5 years ago,” Hays said. “They made kind of a long-term bet on profiting from the energy market. And I think that private equity has made a similar decision. I can see them leaving if things are kind of low and flat for a very long period. But I think as long as there’s froth or prices make it profitable, they’ll stick around.”