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US domestic M&A sent reeling

Deal-making across the oil and gas patch has slowed to a crawl despite a swathe of potential devalued assets and strained companies eager to divest

M&A activity in the Lower 48 states of the US has nose-dived this year, reflecting alarming economic conditions and lack of spare cash available across the sector. Chevron’s recent $5bn takeover of US independent Noble Energy was a rare example of a big-name player splashing the cash, in what has otherwise been an eerily quiet period for deal-making.

Natural gas proved the most attractive segment in the first half of the year, despite Henry Hub gas pricing falling to record lows. The Energy Information Administration (EIA) recorded average monthly spot pricing for the first six months of 2020 at just $1.81/mn Btu, slumping to $1.63/mn Btu during June—the lowest level seen since at least 1989.

“Some see a more bullish outlook for gas prices relative to crude, which is providing support for deals” Dittmar, Enverus

Appalachian gas assets attracted three of top five deals in the second quarter, as interest in gas proved resilient and M&A started to recover marginally. Shell offloaded $541mn in shale resources to US independent National Fuel Gas in the biggest Appalachian sale. The deal included 350 producing wells in the Marcellus and Utica, with combined production of c.250mn ft3/d (7.1mn m3/d).

Elsewhere, Appalachian-focused producer Diversified Gas & Oil completed its $125mn acquisition of assets in the basin from independent gas explorer EQT Corporation, adding c.9,000bl/d oe of production and c.900 operated wells in Pennsylvania and West Virginia.

Deal-making picked up in Q2 but was still the third-lowest quarterly performance in the US since 2009, eclipsed only by Q1 2020 and Q1 2019. Total combined spending sunk to just $0.8bn in Q1, down from $10.2bn in Q4 last year and a high of $65.9bn in Q2 last year, according to data from research consultancy Enverus.   

Long-term gas prospects

The mild US winter, combined with Covid-19 induced energy demand destruction, sent gas prices reeling during the first half of the year. But the outlook remains positive long-term and has supported deal-making. “There are a few reasons for the bullish outlook, including a slowdown in activity among the gas drillers themselves, secular trends supporting gas as it takes more market share from coal power generation and a slowdown in associated gas production from the Permian and other oil plays,” says Andrew Dittmar, senior M&A analyst at Enverus.

The EIA estimates gas prices will average around $2.05/mn Btu for the remainder of 2020 but will start to recover at the tail-end of the year. “Some see a more bullish outlook for gas prices relative to crude, which is providing support for deals,” says Dittmar.

In contrast, the outlook for US oil looks more uncertain and has impacted asset sales. Industry-wide crude production shut-ins, plunging WTI and collapsing global demand this year have reduced deal-making in the shale patch to barely a trickle. Research from financial advisers Mercer Capital highlighted a $60mn drop in median deal size year-on-year in the Permian basin alone, while Q1 oil transactions represented just 4pc of total completed deals.

With Covid-19 infections rising across the US and medical experts pointing to a potentially deadlier second wave in the winter, the risk of further lockdowns later in the year and into 2021 remains. Added to that, long-term structural economic changes may accelerate peak oil and permanently cap the WTI oil price recovery, slashing asset valuations across the oil patch and likely affecting future M&A activity.

$0.8bn – Q1 total deal making

But despite the economic gloom for US oil, there were some stand-out deals across Q2. Blank cheque company Pure Acquisition announced a $845mn merger with Fort Worth oil company High Peak Energy. In June, Texan oil and gas producer Black Stone Minerals agreed to sell Permian mineral and royalty interests worth $155mn to US independent Pegasus Resources. Production associated with the sale was estimated at c.1,800bl/d oe.

Giving the cold shoulder

Chevron’s acquisition of Noble is the biggest US acquisition of the downturn so far, showcasing again a focus on gas, albeit this time in the East Mediterranean. But Dittmar doubts this marks a significant shift in policy among the majors. “I would not be surprised to see the majors cherry-pick an asset here or there if the price is right and the outlook on commodity prices firms up a bit,” he says. “But I do not think they are interested, for the most part in major, broad-based M&A.”

He points out that the majors in the best position to mop up stressed assets are those with the strongest balance sheets, those that were most conservative over the last five years. Chevron had more cash to splash out on Noble because it avoided a bidding war over US independent Anadarko, while ConocoPhillips has showcased spending moderation. But a significant change in strategy now seems unlikely given the volatile economic conditions and the lack of interest even before the downturn deepened.

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