NEW YORK--(BUSINESS WIRE)--After $86 billion in deals in the previous four quarters, US upstream M&A momentum slowed significantly, with transaction value falling to just $8 billion in the third quarter 2017, according to oil and gas information provider 1Derrick. Just 17 transactions over $100 million were recorded, well below the 2008-2016 average of 24. US deal activity slowed across all regions, especially the Permian, where transaction value fell to $1.3 billion from more than $40 billion in the previous three quarters. However, new analysis by 1Derrick of US private equity (PE) investment suggests another round of PE-lead deal making and consolidation is on the horizon.
“After an intense twelve months of deal activity, producers turned their focus to enhancing the development potential of their core areas through acreage trades and operational efficiencies,” commented Mangesh Hirve, COO of 1Derrick. “A decline in oil prices in Q2 pressured capital budgets, which are expected to increase by an average 40% in 2017.” He added, “Upstream investors face a conundrum that while individual well IRRs look attractive, producers are still guzzling cash at a corporate level. Investors in public companies are looking at corporate cash flows and forcing managements to consider divestitures to raise cash for drilling. On the other hand, private capital is willing to take a more long-term view given the inherently strong economics of the best resource plays. As a result, more than 60 new companies have received capital commitments from PE firms so far in 2017.”
US upstream M&A value averaged more than $20 billion per quarter from mid-2016 to mid-2017, driven by confidence in the long-term profitability of premier resource plays such as the Permian Basin. However, the WTI oil price, which averaged $53.47/bbl in February, dipped below $50 in March and reached a low for the year at $45.18/bbl in June. The $6.10/bbl decline in the average second quarter oil price generated average 11% declines in pre-tax operating income and cash flow for a representative universe of 42 major E&Ps. Producers responded by taking steps to boost margins in core areas, especially by trading non-core and non-operated properties for acreage that increased average working interests and expanding extended-lateral drilling opportunities. Thus far, companies have indicated their long-term confidence by largely remaining committed to their expanded 2017 capital programs.
That confidence is also shared by PE firms, which dominated the limited Q3 deal-making. A major focus was the Rockies, where PE-funded Bruin Energy and Oak Ridge Energy acquired $1.4 billion in Bakken assets and Pinedale Anticline assets, respectively. The sellers in both transactions were public companies, Halcon Resources and QEP, shedding non-core properties. In the only other transaction over $1 billion, special purpose acquisition entity Silver Run II, backed by Riverstone Holdings, purchased pure play STACK producer Alta Mesa Holdings, backed by HPS Investment Partners and ARM Energy Holdings LLC. In the only major Permian deal, QEP applied proceeds from its Pinedale sale to the $732 million purchase of Midland Basin properties from private sellers.
New 1Derrick research shows that PE investment is playing a growing role in the U.S. Upstream M&A. The E&P firms they back accounted for over $8 billion in acquisitions and $9 billion in divestitures in 2017. More significantly, these investment entities have committed more than $11 billion to more than 60 new companies so far this year. The largest allocations have been made by Quantum Energy Partners ($2.5 billion to four new E&Ps), EnCap Investments ($1.8 billion to seven new E&Ps), and Apollo Global Management ($1.6 billion to four new E&Ps).
Two new companies received over a billion dollars in start-up equity commitment, Appalachia-focused HG Energy II backed by Quantum Energy Partners and Encino Acquisition Partners backed by The Canada Pension Plan Investment Board. Mid-Continent focused Chisholm Oil & Gas and Valorem Energy received $900 million from Apollo and $300 million from Kayne Anderson, respectively. New Permian firms include Admiral Permian Resources ($600 million from Pine Brook Partners and Riverstone), and QStar II and American Resource Development ($400 million each from EnCap).
This level of PE-investment is likely to trigger another wave of acquisitions and consolidation, according to 1Derrick’s Mangesh Hirve. “Many of these new companies are yet to make their first acquisitions,” he pointed out. “The two notable transactions have been HG Energy II’s $1.3 billion purchase of Noble Energy’s Marcellus properties and Chisholm Oil & Gas’s $625 million STACK purchase. We expect the remaining capital will be allocated in the next two or three quarters as public companies continue to raise cash through divestitures.”
1Derrick/Derrick Petroleum Services (www.1derrick.com) is an independent oil and gas research firm with offices in New York, Houston, London, Singapore and Bangalore. For more information on its industry leading databases and reports on M&A, business development, strategy, new ventures, and exploration, please contact Ajit Thomas at Ajit.Thomas@1Derrick.com or 1.646.284.8661.