Upstream M&A sails over $30 billion in Q2 2024 on ConocoPhillips, Devon Energy, Marathon Oil megadeals

(WO) — Enverus Intelligence Research (EIR), a subsidiary of Enverus, released its summary of Q2 2024 upstream M&A activity.

Upstream M&A activity notched its third consecutive quarter of heightened value with more than $30 billion transacted. That brings year-to-date activity, including July deals, to nearly $90 billion and nearly $250 billion transacted in the last 12 months. Prior to the latest run of consolidation, quarterly M&A value had only topped $30 billion three times since the start of 2017.

“M&A momentum carried into the second quarter as pressure built on companies like ConocoPhillips, Devon Energy and SM Energy, that had previously stayed out of the market to keep pace with peers and grow in scale,” said Andrew Dittmar, principal analyst at EIR.

“In the case of ConocoPhillips and Devon Energy, running out of inventory doesn’t appear to be as high a concern, but there is still a perception that successfully navigating the maturing phase of shale requires building resource base with M&A.”

As seen in Q1, when Diamondback Energy purchased Endeavor Energy Resources, M&A value in Q2 was heavily weighted toward one large transaction with ConocoPhillips acquiring Marathon for $22.5 billion.

The deal, which is the fifth largest U.S. upstream deal of the last decade, is another historic name exiting the E&P space as Marathon Oil has roots that reach back more than 100 years.

Unlike most other big deals in the current consolidation cycle that focused entirely on the Permian basin, Marathon Oil held a diversified asset base that included Permian exposure along with large positions in the Eagle Ford and Williston basin.

“The increasing cost of buying drilling inventory, particularly in the Permian, has been the main story in upstream M&A throughout 2024,” added Dittmar. “With the highest quality inventory selling at premium pricing, there has been a scramble for middle-tier inventory that provides strong returns even if it isn’t as economic as core Permian assets.”

An additional advantage of buying in plays like the Eagle Ford and Williston basin is the ability to capitalize on the potential of older horizontal wells by recompleting them with what the industry terms refracs.

In its investor materials, ConocoPhillips in particular highlighted refrac potential in its Marathon Oil acquired assets, and Devon Energy called out 300 refrac candidates. The opportunity to revisit older wells is something companies are paying increasing attention to, both within their existing assets and when evaluating deal opportunities. Increased refrac potential should generate additional M&A interest in more mature areas like the Eagle Ford and Williston.

Companies are also looking for opportunities to expand their inventory base by testing new zones. Besides high prices in the Permian, SM Energy made a move into Utah’s underdeveloped Uinta basin with its purchase of XCL Resources because the company feels it can develop new productive intervals and expand the resource base to justify its entry price.

“Proving up new economic drilling locations is a top priority for companies and has been the most cost-effective way to extend inventory life,” said Dittmar. “What is substantially different in this market, and a major shift in the industry, is that companies like Matador Resources and SM Energy are willing to prepay for inventory in deals that has yet to be fully proven up by horizontal wells.”

A rising tide of inventory prices has lifted all boats for private sellers, which have capitalized on the market to divest more than $100 billion of assets to public companies since the start of 2022.

Among private equity firms, EnCap Investments has led the way with roughly $20 billion divested since then, including selling nearly $10 billion in portfolio companies since the start of June. Other top sellers during that time include Lime Rock, which invested in CrownRock, NGP Energy Capital and Quantum Energy Partners.

The collection of companies, which are all energy specialist investment firms, reflect changes in the private equity landscape in oil and gas as large, generalist firms have pulled back.

An extremely strong market has also tempted long-held family companies like Endeavor Energy Resources, which contributed $26 billion to total private sales, to exit. An outstanding question in the industry is if more family-owned companies, specifically Mewbourne Oil which now holds the deepest bench of privately owned Permian locations following the sale of Endeavor, will also be tempted into the market.

A sales process by Mewbourne Oil would likely draw attention from all large companies active in the Delaware, potentially including even EOG Resources which has not made a significant acquisition since it last purchased private, family-owned Yates Petroleum in the Delaware Basin in 2016.

There is still room for private equity companies to divest more portfolio companies, particularly in the Eagle Ford and SCOOP|STACK plays. Verdun Oil, backed by EnCap, and WildFire Energy, sponsored by Kayne Anderson plus Warburg Pincus, would be two likely sellers in the Eagle Ford. Companies are also likely waiting on a rally in natural gas prices to divest more portfolio companies focused on that commodity.

With a few exceptions like Tokyo Gas acquiring Rockclff Energy, and Chesapeake Energy merging with Southwestern Energy, gas-focused M&A has been subdued. Low prices have been a drag for deals as potential sellers are reluctant to bring assets to market, especially as they see hope on the horizon from higher gas prices powered by U.S. LNG exports.

A rally in natural gas prices towards the end of 2024 and into 2025 could generate a wave of deals as long-dated private equity investments rush to market.

Beyond rising gas prices, more non-core asset selling is another potential tailwind for M&A in the back half of 2024. “Historically, when there has been a big wave of corporate consolidation like we’ve seen over the last 12 months, companies follow it up by trimming their portfolios and divesting less attractive assets,” concluded Dittmar.

“We should see some of this going forward from companies like Occidental that have a specific mandate to reduce debt, but overall non-core asset selling will probably be fairly subdued because operators don’t want to surrender any hard-won inventory.”