US Shale Deals Off to Record Start, but Will the Market Keep Pace?

The US upstream sector began 2024 with $51 billion in mergers and acquisitions though Enverus outlines why the dealmaking may slow down.

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Dealmaking in the US oil and gas industry has maintained record levels, with over $51 billion in mergers and acquisitions (M&A) announced since the beginning of the year, 60% of which involved assets in the Permian Basin.

The headline figure marks a continuation of last year’s unprecedented wave of consolidation which totaled $192 billion. However, the market appears to be cooling off, according to Enverus Intelligence Research.

“Deals at the start of 2024 were driven by the same factors that led to last year’s marathon of mergers, foremost among them a desire to lock up high-quality inventory when it is available,” said Andrew Dittmar, a principal analyst at Enverus. “Most of that inventory is going to be found in the Permian, so it is unsurprising the prolific basin was yet again the primary driver for M&A within oil and gas.”

Enverus highlighted Diamondback Energy’s move to buy Endeavor Energy Resources for $26 billion as the largest sale it has tracked of a private operator. The market intelligence firm said the deal put Diamondback “in the front row” of Permian producers with a portfolio similar to that of Pioneer Natural Resources before it announced its acquisition by ExxonMobil last year.

APA, the holding company of shale explorer Apache Corp., also expanded its Permian footprint by buying the publicly traded Callon Petroleum for $4.5 billion. Enverus noted that the deal helped APA reestablish its role as a big shale player after previously focusing on a more balanced portfolio of US and international investments.

Dittmar said there are companies that fit the profile of what buyers are looking for, including the privates Mewbourne Oil and Fasken Oil and Ranch.

“However, there are no indications these closely held companies are looking to exit any time soon,” explained Dittmar, adding that this means public oil and gas companies must either consider buying a private producer from an “increasingly thin list” or consider merging among themselves.

Consolidation has also reshaped the Haynesville Shale, most notably underscored by the Chesapeake Energy merger with Southwestern Energy. Enverus said the deal did not add materially to Chesapeake’s drilling inventory but it did give the Oklahoma City-based company greater exposure to the coveted LNG export market that has been driving activity in the gas play for several years.

But this deal and others, including ExxonMobil’s acquisition plans for Pioneer and Chevron’s purchase of Hess Corp., have fallen prey to the scrutiny of the US Federal Trade Commission (FTC) which is tasked with enforcement antitrust laws.

Dittmar suggested that the optics of fewer operators controlling the production of key US unconventional plays has prompted the FTC to step up its review process.

“Ultimately, the most likely outcome is all these deals get approved, but federal regulatory oversight may pose a headwind to additional consolidation within a single play. That may force buyers to broaden their focus by acquiring assets in multiple plays,” he said.

Among the areas Enverus expects to see some of that attention shift to include the Eagle Ford Shale in south Texas and SCOOP/STACK in Oklahoma. The market intelligence firm noted that the two plays are ripe for acquisition due to fragmented ownership and a high number of private equity-backed producers that are eager to find an exit at this late stage.

Eagle Ford’s gas window may also prove to be a draw for companies eager to supply the US Gulf Coast’s various LNG projects. This, combined with the expansive Haynesville play, is poised to attract further international attention. Enverus highlighted the recent investments made by Canada's Baytex Energy, INEOS of the UK, Japan's Tokyo Gas, and TotalEnergies as indicative of the growing interest in US LNG-feedstock opportunities.

Enverus is also monitoring whether private companies will begin to replenish their portfolios after a series of sell-offs to public operators. This typically occurs when large public oil companies divest noncore assets following major acquisitions. However, Enverus notes that corporate balance sheets are currently strong and existing inventories are commanding premium prices, which may reduce the availability of such noncore assets for purchase.

“Opportunities are still there for private equity, but they may need to get more creative. That could include exploring more secondary targets like deep intervals in the Permian or pushing into areas like the Central Basin Platform,” said Dittmar, adding that this may prove a net benefit to the industry as private explorers have a higher risk tolerance that has led to notable discoveries before. “That is something we will need as the core shale plays continue to mature.”