BY MADELEINE DENEZZA, PICKERING ENERGY PARTNERS
Mergers and acquisitions are on the rise in the oil and gas sector, driven by a growing demand for increased production. A multitude of factors, including heightened production demand, reduced private equity support, permitting challenges and an undervalued market are converging to create an optimal environment for an uptick in M&A transactions.
We have seen multiple deals unfold throughout the year. In August, Chevron completed their all-stock acquisition of PDC Energy. Valued at $6.3 billion, this purchase added more than 1 billion barrels of oil equivalent reserves in the Denver-Julesburg (DJ) Basin, as well as 25,000 net acres held by production in the Permian Basin to Chevron’s portfolio.
In the same month, SilverBow Resources announced their agreement with Chesapeake Energy Corporation to acquire their Eagle Ford assets for $700 million. The third quarter of 2023 saw ExxonMobil’s announcement to merge with Pioneer Natural Resources in an all-stock transaction valued at $59.5 billion, as well as Chevron’s announcement to acquire Hess Corporation for $53 billion.
These deals continue to emerge as market dynamics have shaped a healthy environment for M&A. Production demand has risen as the oil market continues to grow throughout the rest of the year and into 2024, with OPEC forecasting 2024 demand to rise by 2.25 million bpd. For the first three quarters of 2023, U.S. oil production has averaged 12.8mm bpd. The previous record was 12.3mm bpd in 2019.
To fulfill the rising demand for oil, E&Ps are looking to expand production. Conventional approaches would suggest boosting capital expenditure and activating more wells. However, this is proving challenging due to permitting bottlenecks, impeding the process of getting new wells up and running. The root of this permitting bottleneck comes from the Bureau of Land Management (BLM) and their significant decrease in drilling permit approval.
Prominent dealmakers emerging tend to be larger energy companies, such as ExxonMobil and Chevron, as mentioned previously. These large energy companies are experiencing market conditions that are creating deals that are too good to pass up. Smaller operators are currently attracting less attention and financial support from external sources compared to the levels seen in previous decades, both on the private and public fronts.
There has been a decrease in private equity investment, with only 10 new E&P investments this year compared to 100 per year last decade, according to Enverus. On the public side, as of November 13, 2023, per Bloomberg, the S&P 500 Energy Index has a NTM EV/EBITDA multiple of 5.75x in comparison to the Russel 2000 Energy Index’s NTM EV/EBITDA multiple of 3.85x, indicating undervaluation of publicly traded small and mid-sized energy constituents, relative to their large-cap counterparts. The lack of support on both the private and public fronts creates demand for acquisition by large energy companies and a necessity for strategic consideration on the part of smaller operators that may be struggling to raise capital in a rising-interest rate environment.
The inability to generate self-sufficient levels of cash flow leads to an inability to pay off debt, and in turn an inability to utilize leverage. The situation is intensified by rising interest rates, rendering inorganic growth opportunities more enticing for both the acquirer, and acquired companies.
Heightened production demands, permitting challenges, reduced private equity support, an undervalued market and high interest rates create an environment that is ripe for continued consolidation. These favorable market conditions are serving as the backdrop of the surge in M&A seen this year with the goal of increasing production capabilities. This transformative period underscores the need for adaptability and strategic decision-making by leaders, at both the large and small-cap level, in the sector to ensure oil demand continues to be met in a secure and cost-effective way.
Energy Workforce partner Pickering Energy Partners provides insights on ESG due diligence, disclosures and reporting. Madeleine DeNezza is an Analyst, specializing in ESG Strategy & Integration.