Economic downturns usually spur a surge in mergers in the US oil and natural gas business, but several factors may be holding up another round of deal-making.
Before this spring's crude price crash caused by the Opec+ conflict and Covid-related demand drop, deals such as Occidental's 2019 purchase of Anadarko were seen as likely repeat transactions. Independents Pioneer Natural Resources and Concho Resources were among those seen as possible targets for larger peers.
But the global recession has created a chaotic corporate landscape for US exploration and production, as debt-laden giants stumble amid distressed assets, and a shrinking number of smaller, healthier firms maneuver to avoid damage. The uncertainty of the demand and price recovery, and a turn away from a "growth for growth's sake" mentality has led to the idea of big mergers falling out of favor.
More likely scenarios are narrowly focused asset acquisitions in specific fields — like ConocoPhillips' acquisition of 140,000 acres (556mn m²) in Canada's Montney region last month from Calgary-based Kelt Exploration for $375mn. A steady trickle of bankruptcies of smaller firms is putting acreage in play for even more such one-off purchases.
Also possible are mergers of equals — the pairing of two similarly matched companies with complementary assets. Some analysts have mused over Devon Energy and Cimarex as potential partners, seeing Devon's midcontinent assets as a good fit with Cimarex's Permian basin position.
The two largest deals in recent months may have broken the ice — Chevron's $5bn all-stock deal for Noble and Southwestern Energy's $865mn takeover of fellow natural gas producer Montage. But a major like Chevron buying a smaller competitor may be hard to replicate, as the wheels on the Noble deal started turning last year, well before Covid-19. And with stock prices depressed by the downturn, management teams may feel less motivation to do a deal given that their compensation in change-of-control situations is usually in stock.
Melinda Yee, a partner in consultancy Deloitte's oil and gas mergers and acquisitions (M&A) practice, doubts there will be many more deals this year. The challenge of firms finding the right partner, with complementary assets, takes longer.
"Companies need a transaction to be immediately accretive, so they have to be pickier, make sure it's the right fit," Yee says. They are more likely to wait for Chapter 11 bankruptcies to get debt issues cleaned up, which can take months.
Some firms are eager to shop. Continental Resources has "teams working very diligently, looking for these unique opportunities in this unique window of time. And they are getting some traction," president Jack Stark says. But with many finding a new faith in higher shareholder returns and more modest output growth, taking on more capacity and acreage can be a questionable decision.
Rock it to 'em
Cimarex chief executive Tom Jorden notes that growth through the drillbit — raising output by fully developing the acreage already under lease — is more predictable and manageable than growth through acquisition. "M&A is more episodic," he says. "It's pretty tough to predict the kind of consistent value generation through M&A that we found through drillbit growth. Not that we're not open to it."
And acquisitions do not make sense for Diamondback Energy chief executive Travis Stice, because debt for publicly traded upstream firms that he might consider buying is trading so poorly. Following second-quarter earnings, many firms have returned to debt markets to retire pending notes for later-maturing ones. But the fundamentals are still in doubt.
"It's all about the rock," Stice says, referring to the underlying geology of a company's acreage. "If you find good rock, you shouldn't care whether it's public or private. There's just not a lot of tier 1 rock out there."
