Permian asset ownership shifts as public E&Ps look to shore up inventory
CALGARY, Alberta (July 25, 2023) — Enverus Intelligence Research (EIR), a subsidiary of Enverus, the most trusted energy-dedicated SaaS platform, is releasing its summary of 2Q23 upstream merger and acquisition (M&A) activity. In Q2, U.S. upstream M&A boomed with $24 billion transacted in 20 deals with the Permian returning to its usual position as the center of M&A activity. One notable exception to this Permian-centric quarter was Chevron’s purchase of primarily DJ-focused producer PDC Energy for $7.6 billion, though PDC also has a footprint in the Delaware Basin. That deal helped drive a remarkable $1.2 billion average size for deals with a disclosed value in Q2, more than double the average Q1 deal.
“The second quarter saw a thunderous return to Permian M&A after a relatively quiet start to the year,” said Andrew Dittmar, director at Enverus. “The need for public buyers to secure quality drilling inventory has been brewing, and the pressure to make a deal has been mounting as the remaining opportunities are narrowed with each successive transaction. That in turn is driving higher valuations on the remaining assets.”
Top five U.S. upstream deals of 2Q23
Source: Enverus M&A Analytics
There were six deals that topped $1 billion during the second quarter of 2023, and five of them involved at least some assets in the Permian including PDC. Four of the six were buyouts of E&Ps funded by private equity (PE) that operated entirely in the Permian by public companies. EnCap was the largest seller unloading four portfolio companies for a combined $5.8 billion. NGP was the second most active firm, selling Permian assets with two sales for a combined $4.7 billion. In aggregate, year-to-date in 2023, PE firms have sold $14 billion in assets and $61 billion since the start of the 2021, primarily in the Permian. That marks a material shift in the ownership of upstream assets toward public companies as PE is not buying in at nearly the pace it is selling.
“The formation of new private-equity-backed E&Ps hit its peak in 2017 and now, six years later, those investments are being unwound via sales to public companies,” added Dittmar. “For those that invested in the Permian Basin, the returns are likely substantial. The value of undeveloped inventory has climbed sharply over the last 12 months and public companies are more likely to pay for assets toward the margins of the basin versus focusing strictly on the core. Each sale seems to bring a higher valuation than the one before. With just about 20 private companies left in the Permian that have more than 100 net locations, and many of those unlikely to sell, we anticipate this trend will continue.”
PE hasn’t abandoned the upstream space wholesale, but new capital is being raised and deployed at a much-reduced pace. So far in 2023, PE firms have made around 10 commitments to upstream teams versus more than 100 per year at the pinnacle of activity, according to Enverus data. “Nearly all new commitments are going to established teams with a track record of success,” said Dittmar. “While prior success may have been found in the Permian, these groups are increasingly looking outside that basin due to high competition for Permian deals. The Eagle Ford and Williston Basin seem to be popular destinations for those priced out of the Permian.”
With PE activity in the industry slowing and fewer remaining opportunities to buy private companies, public company M&A is likely to take on an increasingly important role in the overall deal market. There has already been some movement in that direction with $15 billion in public-public deal making in 2023. That includes the purchase of PDC by Chevron in Q2 as well as the merger of Baytex Energy and Ranger Oil in Q1 and the acquisition of Denbury by Exxon Mobil for $4.9 billion already in Q3. While all in different regions, and in Denbury’s case more focused on carbon mitigation than upstream production, all three deals share a heavy use of stock for consideration including all-equity in the case of the Chevron and Exxon deals, and a low premium to current shareholders.
“It is surprising to see corporate sellers willing to take the same kind of low-premium, all-equity deals that were in vogue in 2020 while the industry was still reeling from the effects of COVID-19, given how much healthier the upstream space is today,” said Dittmar. “However, none of these deals included core Permian companies that may demand a higher premium.”
For the remainder of 2023, there are a handful of private Permian assets still available and a number of these are likely to find buyers before the year is out. However, as private opportunities further dwindle more companies are likely to consider corporate mergers with other public companies, and that is likely to provide the next M&A fireworks. Potential combinations include both mergers of equals between the smaller companies or sales to a larger peer. The majors seem poised to participate in potential dealmaking, which opens the possibility for even the largest independents to become a target. For smaller companies with a lack of inventory and few options to increase it, finding a corporate merger partner may be the best route forward. Gas deals, which were notably absent in the first half of 2023, could also potentially find traction as the commodity hits a bottom and buyers look to play a rebound driven by growing U.S. LNG exports in coming years.
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