(Bloomberg) — Some shale producers are seeking deals even as the biggest names in oil and gas, Exxon Mobil Corp. and Chevron Corp., remain on the sidelines digesting their mega mergers after a blistering run.
Dealmaking activity in the sector is poised to remain robust, and could even include more blockbuster transactions, against a backdrop of healthy demand and oil prices hovering around the key $80 a barrel level.
The largest U.S. producers have gone on a buying spree in the past 12 months to respond to investors’ calls to curb exploration activity and costs, while trying to stay relevant in a disfavored, but still wildly lucrative industry. They found an opportunity to add to their production and inventory assets by scooping up smaller rivals.
“It will be hard to grow new reserves organically,” said Jefferies Financial Group Inc. Managing Director Conrad Gibbins. “So the ability to acquire higher cost, smaller businesses clearly becomes an attractive alternative.”
Pioneer, Hess
During the year ended June 30, $265 billion in deals for oil & gas companies were announced globally, according to data compiled by Bloomberg. Exxon’s $60 billion purchase of Pioneer Natural Resources Co. and Chevron’s $53 billion takeover of Hess Corp., which has hit an arbitration snag, added to the tally.
Before the recent wave of transactions, quarterly M&A values had topped $30 billion only four times since 2018, the data show.
Hunting for scale, a cohort of smaller producers including Devon Energy Corp. and Permian Resources Corp. have clinched their own, perhaps less splashy deals. Devon paid $5 billion for privately held Grayson Mill Energy, boosting its presence in the Bakken, one of the most coveted basins outside the Permian. Permian Resources acquired acreage in the Delaware basin from Occidental Petroleum Corp. for more than $800 million.
Franklin Mountain
There could more acquisitions in their sights. Franklin Mountain Energy, one of the last large closely held oil producers in the Permian Basin is exploring a sale, Bloomberg News reported last week.
Another Permian play developed by Double Eagle and backed by private equity firm EnCap Investments that could be worth $6 billion or more is also on the block, according to people familiar with the matter, who asked not to be identified discussing confidential information. Reuters first reported on Double Eagle’s potential sale.
The risk of not participating in the M&A frenzy is that, when the wave of consolidation resumes, producers lacking a clear path to grow could face pressure from shareholders to fold instead.
“There are a number of folks out there that are looking to become, or at least enhance their ability to become, long-term survivors by adding sizable assets to their business mix,” said Moelis & Co. Managing Director Steve Trauber.
Election overhang
The overhang on transformative deals coming from the looming presidential election is buying potential targets some time.
“A lot of people are waiting to see what sort of regulatory environment they’re going to walk into,” said Steve Gill, a partner at law firm Vinson & Elkins.
But when the oil majors take another look at the chess board, they’ll see that coveted closely held companies such as CrownRock LP and Endeavor Energy Resources are gone, meaning they’ll have to look at the public market to find more landmark deals.
“If you’re one of the majors and you’re looking to do a needle-moving transaction, it would have to be another public,” Gill said.
