Upstream Upstream mergers and acquisitions sinks 13% in 2022

Wheeling and dealing in the final quarter of 2022 turned as chilly as the approaching winter, capping a year that saw a sharp decline in deal values.

Enverus Intelligence Research (EIR), a subsidiary of Enverus, the energy-dedicated SaaS platform, said in its summary of fourth quarter upstream mergers and acquisitions that $13 billion was transacted in the fourth quarter. For the full year, EIR said upstream M&A saw $58 billion transacted in 160 deals. While values ​​are down 13% from the previous year, the volume of deals collapsed to the lowest level since 2005 and buyers sought large deals in the billion-dollar range.

Two of the largest deals in the fourth quarter of 2022 were Midland Basin acquisitions by Diamondback Energy, historically one of the more active buyers in the region. Diamondback spent $1.59 billion in October for FireBird Energy and $1.55 billion a month later for Lario Oil & Gas. Cumulatively, the company spent a little more than $3 billion to add nearly 500 new drilling locations that are highly economic in the current oil price environment. For Diamondback, adding inventory is more of a luxury than a necessity as the company already has more than a decade’s worth of top-tier inventory.

“The need to secure inventory is the biggest driver of M&A right now as investors are discounting public companies that are light on locations,” Andrew Dittmar, director at EIR, told the Reporter-Telegram by email. “At a minimum, you want to be replacing the locations you are drilling each year and ideally extending the life of your high-quality runway. However, deals for high-quality inventory are becoming increasingly hard to find and expensive as the opportunity set dwindles.”

It was smart of Diamondback to make its acquisitions, as it was for Matador, which recently announced a $1.6 billion deal to purchase Advance Energy Partners for a bolt-on acquisition in the core Delaware, he continued. He noted that Matador will be able to add a significant number of high-quality locations immediately competitive in its portfolio for drilling capital.

Advance is an example of a portfolio company private equity firms are looking to monetize, in this case by EnCap, as it came to the end of its investment timeline.

This year, Dittmar wrote, private equity will remain the primary – and active – seller. Current valuations being placed on high-quality assets means prior investments should pay off well for the sponsors. For small cap companies struggling to compete for the best deals, the route forward may be challenging. That may influence more of them exploring a potential capital deal like HighPeak Energy is doing with its strategic alternatives process, he continued.

High-quality assets in the core of the Permian, Eagle Ford and other plays will likely dominate activity this year, according to Dittmar. Small to mid-cap companies trying to compete with the large companies may have to look at tier two or tier three opportunities, “but the market does not appear to be there yet,” he wrote.

Strong commodity prices, which have resulted in healthy balance sheets for upstream companies, have opened more opportunities versus past years, Dittmar wrote.

“With strong cash flow generation, it is possible to largely fund M&A internally with cash on the balance sheet. Stock is also on the table if sellers would rather retain some upside and is a particularly attractive currency if you are one of the more highly valued E&Ps like Diamondback,” he wrote. “Debt is also available, and a little leverage can be a multiplier on returns, although it may not be an overly popular option in a rising interest rate environment and E&Ps are likely to say very cautious on overall debt loads.”

As far as expectations for the M&A market in 2023, Dittmar offered, “I think we see an active market as long as oil prices hold up, which we think they will. Gas could be a little more challenging to start the year as the commodity continues to struggle but could see a rally in gas deals in mid-2023.”

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