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M&As rise due to price, credit upswings EIA reports 93 E&P mergers and acquisitions in third quarter averaging $179 million each, largest per deal average since 2014 KAY CASHMAN Petroleum News
The U.S. Energy Information Administration reported Nov. 2 that exploration and production companies in the United States are increasing merger and acquisition spending as stable crude oil prices and improved credit conditions in recent months allowed companies to purchase assets or entire companies.
The increase in M&A spending “suggests improved investor sentiment in the oil industry,” EIA said.
The deals are concentrated in the Permian region, the area where the most drilling rigs have been deployed recently. The Permian is also the only onshore area where production is expected to increase in October and November, the agency, which supplies independent statistics and analysis, reported.
Among others, this sentiment is shared by the chief financial officer of the second largest public oil company in the world. On Nov. 1 in a quarterly earnings conference call, Simon Henry, Royal Dutch Shell’s chief financial officer, referred to the Permian as “the hottest properties on earth at the moment … where $50,000 an acre appears to be the going rate.”
The second half of this year through Nov. 1 “already has more M&A spending than the first half of 2016, but on fewer deals,” EIA said. “The 93 M&A announcements in the third quarter of 2016 totaled $16.6 billion, for an average of $179 million per deal, the largest per deal average since the third quarter of 2014,” the agency said.
Of the 71 deals valued at $1 billion or more since 2011, nine occurred in the third and fourth quarters of this year, as compared with only four in all of 2015.
Six of the larger deals involved assets in the Permian Basin, which accounted for more than half the deal value in the fourth quarter, which saw a total of 28 deals.
EIA listed several recent notable M&A deals:
• SM Energy said Sept. 1 it acquired 24,783 net Permian Basin acres in Howard County, Texas, in its $980 million purchase of Rock Oil Holdings;
• EOG Resources said Sept. 6 it will acquire Yates Petroleum for $2.5 billion, doubling its acreage in the Delaware Basin, part of the Permian Basin area;
• RSP Permian said Oct. 13 it will acquire Silver Hill Energy Partners and Silver Hill E&P for $2.4 billion;
• SM Energy said Oct. 18 it will sell $785 million in Williston Basin assets in the Bakken region and spend $1.6 billion through cash and shares to acquire 35,700 net Permian Basin acres in the Midland Basin from QStar LLC.
More Permian deals have since gone down, including Occidental Petroleum’s Oct. 31 acquisition of 35,000 net-acre Permian interests in a $2 billion deal with multiple, undisclosed parties at an average price per acre of $42,000.
Rig count up in Permian Continued increases in the U.S. rig count “suggest companies are beginning to invest capital in E&P projects. Most increases in rigs over the past six months occurred in the Permian, which now holds nearly as many active rigs as the rest of the United States combined, including both on- and offshore rigs,” EIA said.
The agency’s Oct. 15 monthly Drilling Productivity Report can be found at www.eia.gov/petroleum/drilling/#tabs-summary-2.
Two related factors likely contributing to an increase in M&As are an increase in crude oil prices and a reduction in credit spreads. On Oct. 19 West Texas Intermediate crude oil prices closed at $51.60 per barrel, the highest level since July 2015 and nearly twice the recent low point of $26.21 per barrel reached in February 2016.
Since Oct. 19 prices have fallen by about $6 a barrel, but remain well above early-year lows.
The “option-adjusted spread of high yield energy bonds to U.S. Treasury bonds, a measure of default risk, declined since oil prices bottomed and is now at the same level it was in November 2014, when oil prices were above $70 a barrel,” the agency said.
Credit spreads declined nearly 50 percent compared with October 2015, when prices were in the same $45-$50 range.
“Improved credit conditions in the energy industry lowers the cost of borrowing and allows many companies to issue equity to increase liquidity in their balance sheets or make opportunistic purchases,” EIA said.
Companies that defaulted on a bond or were upgraded to investment grade standing are removed from the Bloomberg High Yield Corporate Bond Index over time.
Continued M&A and investment could lead to an increase in Lower 48 crude oil production, consistent with EIA forecasts that increased production will occur in the second quarter of 2017. However, this production forecast is predicated on the WTI price forecast in the EIA's October Short-Term Energy Outlook, which is highly uncertain. Significant divergence of actual prices from the projected path of $55 per barrel (Brent) in fourth quarter 2017 “could change the pace of new-well drilling, which would in turn affect the production forecast,” EIA said.
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