Permian basin and Russia split M&A surge

Upstream oil and gas merger and acquisition (M&A) activity took a deep dive following the crash in oil prices in late 2014.

A combination of crude oil shedding more than half its value with lingering industry uncertainty over where prices would be going forward left many wary about buying or selling assets. But improving oil prices in 2016 have nearly doubled M&A in the United States, according to 1Derrick, an oil and gas industry research provider.

Reversal of fortunes

U.S. upstream M&A activity reached $58.3 billion in 2016, up from a seven-year low of $31 billion in 2015.

The oil price recovery triggered a surge of acquisitions in U.S. unconventional plays dominated by the Permian, which has week over week remained the most active play in the country. For the week ended December 16, 2016, the Permian held 258 active rigs – nearly six times more than the Eagle Ford, the second most active play in the country.

The increased in M&A activity was slow to start in 2016, with just $5 billion of deals in the first quarter of the year. Mega-deals (valued over $1 billion) rose from 4 in 2015 to 14 in 2016 as producers and private equity investors competed to build-out larger positions in premium plays. The number of transactions over $100 million also rebounded from just 59 in 2015 to 95 in 2016.

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Transactions in the Permian accounted for almost $26 billion in value – over $20 billion in the second half of 2016 – and represented 10 of the 20 largest deals. Overall, U.S. unconventional plays represented 18 of the 20 largest transactions.

Many analysts and market spectators suspected that the drop in oil prices would lead to wide-spread consolidation, but that does not appear to be the case. Only one significant deal – Range Resources’ (ticker: RRC) $4.4 billion acquisition of Memorial Resource Development – followed the expected trend. Buyers overwhelmingly sought to increase positions in plays like the Permian, while sellers hoped to monetize non-core acreage as oil prices stabilized.

Private equity firms were active on both sides of the table in the U.S., with 31 acquisitions and 21 divestitures.

M&A in Russia represents 43% of international deal value

On the international side of M&A markets, Russia proved to be the focus for most deals. International M&A improved to $62.6 billion from $34.3 billion in 2015 (excluding Shell’s (ticker: RDSA) acquisition of BG for $82 billion, which propelled 2015 M&A to $116 billion) with Russia accounting for $27 billion, or 43% of international value.

Russian corporate activity included the three largest 2016 international transactions, the $11 billion acquisition of a 19.5% stake in Rosneft by Glencore and Qatar Investment, Rosneft’s $10.4 billion purchase of an 87.6% stake in Bashneft, and an Indian consortium’s $2.9 billion acquisition of a 34.9% stake in Vankorneft from Rosneft.

Canada’s M&A activity accounted for another $15.6 billion, topped by Suncor’s $4.54 billion acquisition of Canadian Oil Sands.

Outside of Russia and Canada, only five deals over $1 billion were struck, noted 1Derrick. These include Statoil’s $2.5 billion acquisition of 66% interest in Carcara discovery from Petrobras, ExxonMobil’s $2.5 billion offer for InterOil, Rosneft’s $1.58 billion acquisition of 30% interest in Zohr field from Eni, KazMunayGas $1.22 billion offer for remaining 36.87% stake in KazMunaiGas EP, and BP divesting Norwegian subsidiary to Aker and Det Norske for $1.15 billion.

Why this recovery is different

U.S. Upstream Oil & Gas M&A Nearly Doubles in 2016 as Operators Flock to the Permian

Chart: CNBC. Source: PLS.

Its because drillers have been able to slash capital spending in areas where production isn’t economical, PLS Managing Director Brian Lidsky told CNBC. At the same time, they’ve wrung cost reductions from oilfield services firms and used technology to help them drill more efficiently.

“A prime example is the Permian Basin, where you are increasing recoveries significantly, at significantly lower costs, so you get a double positive on the economies of that play,” he told CNBC.

The flow and motivation for buying and selling is also changing.

“Many deals were made earlier this year because sellers needed cash to pay down debt, but now some private equity firms that bought energy assets have reached the end of their holding periods and need to divest them, PwC said in its latest quarterly report on oil and gas deal-making,” according to CNBC.

Past recoveries “were mainly driven solely by price. This is a price and cost reduction recovery,” Lidsky said. Because the improvement in the cost structure differs so greatly from basin to basin, the industry isn’t seeing a broad-based recovery, but one led by the high-value basins like the Permian.


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