Window still open for US shale deals [NGW Magazine]

Deal-making activity is fairly muted now, but shale gas assets are still changing hands in North America nonetheless. This is playing out both through asset sales and mergers and acquisitions (M&A). Whereas in previous industry downturns, companies have been on the hunt for bargains, this time debt-laden, struggling companies are generally being left alone. Instead, better-performing companies – with extensive inventory and relatively strong balance sheets – are seeking to combine in an effort benefit from synergies and economies of scale.

“Unlike prior transactions, deal logic de-emphasises growth and focuses on high grading portfolios while reducing cost structures, providing both parties transaction upside from the benefits of scale,” investment bank Morgan Stanley explained in a note on M&A trends in North American energy.

Deals announced recently include a mix of purely gas-focused properties and transactions in which gas forms part of a broader package of oil and gas assets that have attracted a buyer. In any case, activity may be comparatively limited, but at least some further deals are expected.

Several noteworthy transactions have occurred recently or are still in the process of being completed. The largest is Chevron’s $13bn acquisition of Noble Energy in an all-stock transaction, which closed on October 5. While Noble’s operations in the eastern Mediterranean were an attractive way into the region for Chevron, this acquisition also came with unconventional assets in the US, notably in the Permian and Denver-Julesburg (DJ) basins. These assets are liquids-weighted – at around 80% in the Permian and 70% in the DJ – but gas forms part of the overall picture.

Separately, even as it acquires certain shale assets, Chevron is offloading others. In particular, the company is marketing around 800,000 acres worth of gas assets in Appalachia, having attributed more than half of a $10-11bn write-down in the fourth quarter of 2019 to them. In mid-September, Reuters reported that EQT Corp had bid, but EQT told NGW it did not comment on market rumours.

This is not the only activity in Appalachia. In August, Southwestern Energy agreed to take over Montage Resources in an all-stock transaction that is expected to create the third-largest producer in the region when it closes in the fourth quarter of this year. The deal was the third largest of the third quarter among US upstream deals, according to energy data firm Enverus.

Another company that is offloading some shale assets while taking on others is Devon Energy, which completed the sale of its properties in the Barnett shale gas play to Banpu Kalnin Ventures (BKV) on October 1. This came in the same week that Devon announced that it was combining with WPX Energy in an all-stock “merger of equals” – the second-largest deal of the third quarter.

The combined company will have its core assets in the Permian’s Delaware sub-basin, while the balance of the portfolio will be spread across the Anadarko, Williston and Powder River basins, as well as the Eagle Ford shale. As in the case of Chevron, Devon is offloading dry gas assets while taking on a mix of oil and gas.

“It's either larger, financially stronger companies [such as Chevron] or this ‘merger of equals’ type of transaction that we're seeing most frequently in the current market,” EY’s US oil and gas independents leader, Kris Anderson, told NGW.

Trends

A few trends are emerging from these deals and others that have occurred recently. An initial pivot towards gas-focused deals earlier this year, amid the collapse in oil prices at the height of the first wave of the Covid-19 pandemic, appears to have been corrected more recently.

“In the height of the pandemic during Q2 2020, when oil prices were at their lowest, there was a clear swing towards gas-weighted deals,” Evaluate Energy’s lead M&A analyst, Eoin Coyne, told NGW. “If we look at the number of deals over $50mn in Q2 2020, 78% of these were gas-weighted (at least half the deal’s production or reserve profile was gas). The usual split using this measure is around 40% of deals being gas-weighted,” he said.

“In the latest quarter, Q3 2020, the ratio of gas weighted deals has dropped to around its usual level at 43%,” Coyne continued. “I think this is due to the oil price stabilising at $40/barrel in the past few months and optimism that it will increase again once the pandemic is on the wane.”

Enverus’ senior M&A analyst, Andrew Dittmar, agreed that while certain leading US gas-focused producers had been trying to pivot more towards oil in recent years, the crash in crude prices disrupted this somewhat.

“Gas has been a little bit more resilient,” Dittmar told NGW. “We've seen the strip and spot prices hold up at a level that is a little bit more reasonable for producers to make money. So maybe there actually has been a little more optimism around the gas side of it, and we saw that in Q2 with asset deals.”

He added that in terms of corporate consolidation, however, there was more room among the oil-focused side of the industry. “There are more companies [in oil], bigger plays and that's where the focus of the industry has largely been for the last few years,” he said.

Indeed, the Permian Basin, which yields both oil and considerable volumes of associated gas production, remains the major focus of the industry. According to the Baker Hughes rig count, the basin accounted for 129 of the US’ 266 active oil and gas rigs – or 48.5% – in the week up to October 2. However, even Permian deals have been affected by the disruptions of 2020.

“We have a metric which shows what percentage of total deals each quarter is composed of deals where the Permian Basin is the primary asset being acquired and interestingly this was lower in Q3 2020 than in any other quarter in the previous five years,” Coyne said. “This metric will jump back up given Devon’s acquisition of WPX and we would expect it to jump as it is still the premier asset in the US to be in if the oil price rises again.”

However, a focus on the Permian does not rule out more transactions focused on dry gas plays. Dittmar said that based on the economics, both the Appalachian and Haynesville shale basins could see further deals.

“There are five or six companies [in Appalachia] that you can see consolidate down in some form going forward,” he said. “The limiting factor for how consolidated the industry may get is that there's really not that many of them out there,” he added, referring to companies involved in both gas and oil. “It's going to be a bit limited just by the number of attractive partners that are available for these mergers.”

Nonetheless, Anderson sees scope for further consolidation, both in regions such as the Permian and in gas plays. “We see the overall trend being one of industry consolidation. It’s really starting to take hold and accelerate,” he said.

The other notable factor in the recent deals is how many are all-stock transactions. Dittmar noted that it would normally be majors that would be expected to spend cash. However, even Chevron’s acquisition of Noble was an all-stock deal, and it may be the last one by a major for some time. “It's hard to see any of them making a major shale acquisition at the moment,” Dittmar said.

Among independents, all-stock deals appear to be a likelihood, but may not be the only option. “All-stock deals have been a necessity for many companies to avoid having to raise finance but there is an increasing number of assets coming to the market via bankruptcies,” said Coyne. “These assets will require a cash purchase and should prove very tempting for bidders to offer below-market valuations.”