The oil price collapse has taken its toll on mergers and acquisitions (M&A) across the U.S. oil and gas industry as companies preserve cash in these highly uncertain times.
The appetite for dealmaking in the second quarter, when WTI Crude prices plunged to a negative $37 a barrel one day in April, was so low that Q2 ranked as the third-lowest quarterly value of upstream deals since 2009, oil & gas data analytics company Enverus said this week.
Compared to the first quarter, the value of oil and gas deals jumped by more than 200 percent in Q2 – to US$2.6 billion from just US$770 million in Q1, Enverus’ U.S. upstream M&A report showed.
However, the second-quarter deals included Pure Acquisition Corporation’s US$845-million merger with HighPeak Energy in the Permian’s Midland basin—a deal that was announced at the end of 2019 and was later recalibrated after the oil price crash. This was the biggest deal in terms of value in Q2.
The other major deals in the top five were for gas assets, predominantly in the Appalachia region, where buyers scooped low-cost assets amid stronger future pricing of natural gas compared to the lows in spot prices seen so far this year.
“While the spot market for natural gas is still suffering from low prices, the future curve 12 or 24 months out is significantly higher. That is permitting buyers to hedge future production at levels that support deal economics,” Andrew Dittmar, senior M&A analyst at Enverus, said.
The largest gas deal in Q2 was Shell’s sale of its Appalachia shale gas assets for US$541 million to National Fuel Gas Company (NFG).
Deals in the oil industry, however, continue to be scarce and challenged by volatile prices and uncertain demand recovery.
“Broadly, the market for new deals remains highly challenged, particularly in oil plays,” Dittmar added. Related: Exxon Is Big Oil’s Outlier In The Post-Pandemic World
In Q1, the deal market collapsed, Enverus said in its M&A report for the first quarter, with all deals taking place before the crash in oil prices in early March, and the largest deals including a bankruptcy sale.
Looking beyond Q2, Enverus sees more gas asset sales, provided that futures prices stay high, with sales potentially extending from Appalachia to other areas of low-cost supply such as the Haynesville.
“However, the market for assets in major oil shale plays, which were the key driver of M&A values for quite a few years, is likely to remain challenged barring a rally in crude prices. Public companies of all sizes are facing significant financial headwinds, making it difficult to convince skeptical investors on the value of M&A,” Enverus said.
There could be some great value opportunities for deals in this environment, as consolidation is a necessity, Deloitte said in a recent report on the U.S. shale patch.
“The key question is what to buy and, more importantly, what not to buy. Any large acquisition or merger should be considered only if one plus one is greater than two on both operational and financial fronts,” according to Deloitte.