Shale sector consolidation far from over

After a blockbuster year for US oil and gas deals, the pace of acquisitions is unlikely to ease as assets in basins outside the Permian increasingly catch the eye of potential suitors.

A slight pause is expected around the presidential elections in November, before transactions — which have surpassed $100bn so far in 2024 — pick up through to the end of the year and into 2025, both in terms of takeovers and recent acquirers looking to dispose of assets that no longer compete for capital in their combined portfolios. The initial rush of deal-making in the Permian basin of west Texas and southeastern New Mexico, which kicked off in late 2023, has now spread to other regions across the shale patch.

"What's driving that is really operators are focused on consolidating operations in the areas that they're already operating in," consulting firm Ernst & Young's strategy and transactions energy partner, Bruce On, says. The opportunities to make savings by leveraging and sharing logistical networks, supply chains, technology and experience around drilling and well completions have been key drivers as capital discipline remains the sector's guiding light.

While the Permian was the focal point of deal-making in the second half of 2023 — with transactions in excess of $89bn and accounting for 92pc of total deal-making — that is no longer the case, according to consultancy Rystad Energy. The Permian's share of overall mergers and acquisitions (M&A) fell to 46pc in the first half of 2024 and was about 18pc in the second half, as of the end of August, Rystad says. "This declining share is attributed to the limited remaining opportunities in the basin, which has also resulted in tougher competition among potential buyers and premium valuations," Rystad vice-president for upstream Atul Raina says.

The shift has seen other basins come to the fore, such as North Dakota's Bakken, Pennsylvania's Marcellus and South Texas' Eagle Ford. The share of deal value in the Bakken rose to 12pc of all M&A transactions in the first half of 2024, from virtually nothing in the second half of 2023, Rystad says. The Marcellus accounted for 14pc of deal-making and Eagle Ford 13pc, over the same period.

Permian envy

Examples of buyers looking further afield include US independent SM Energy, which bought assets in Utah's Uinta basin from private equity-backed XCL Resources for $2bn. "We'd love to add that kind of asset in the Permian," SM Energy chief financial officer Wade Purcell says. "Getting something of size anywhere near that price, that's really hard right now."

As part of the latest acquisition spree, recent buyers are looking to see how their combined asset base fits and what they want to offload. "They're quickly looking to go to market with those non-core assets, so we expect to see this cycle that will accelerate additional M&A activity in the sector," Ernst & Young's On says.

Just this week, US independent producer APA announced the sale of non-core Permian assets to an undisclosed buyer for $950mn. That built on the company's sale of other Permian and Eagle Ford assets for a combined $700mn earlier this year. "Through multiple transactions completed this year, we have high-graded and focused our US asset base," chief executive John Christmann says. The proceeds will go towards paying down debt taken on as part of APA's $4.5bn all-stock takeover of Permian-focused Callon Petroleum at the start of the year.

More than $46bn worth of upstream assets remain on the market in the US, with shale accounting for 80pc of the total, according to Rystad. Private equity-backed operators are likely to keep selling off assets to take advantage of rising demand from public peers to add inventory and build scale.

By Stephen Cunningham