Two oil and gas megadeals with a combined value of $113 billion have already been announced in the fourth quarter, leaving Wall Street analysts with differing views on which driller will be part of the next deal but confident that more transactions are coming.
In the wake of Exxon Mobil Corp.'s announcement of a $60 billion deal for Permian Basin neighbor Pioneer Natural Resources Co. and Chevron Corp.'s $53 billion agreement to purchase Hess Corp., analysts began speculating which companies would be the next buyers and sellers.
"Operators continue to find ways to extend inventory while simultaneously boosting shareholder returns," Truist oil and gas analyst Neal Dingmann told clients in an Oct. 23 note. Truist predicted M&A will remain active in the near term because there are numerous exploration and production companies (E&Ps) but relatively little top-tier acreage, and future major discoveries are unlikely. That means smaller companies need to scale up and increase operational efficiencies in order to compete.
Dingmann said crude oil drillers like Permian Resources Corp., Chord Energy Corp., Magnolia Oil & Gas Corp. and Callon Petroleum Co. are acquisition targets, as are shale gas E&Ps Southwestern Energy Co. and Gulfport Energy Corp. Even better deals can be found in the small-cap group, Dingmann said.
"We believe the low valuations make many E&Ps attractive acquisition targets, as larger operators could pay a premium and still show immediate accretion," he said.
Good deals among small-cap players
Among the companies that Dingmann covers, Civitas Resources Inc., Callon, Crescent Energy Co., Northern Oil and Gas Inc., SilverBow Resources Inc. and Gulfport have the most attractive value for a larger buyer. The target could get a small premium for making the deal and hook itself to a larger operator for growth that the small-cap driller cannot fund on its own, he said.
"We believe there remains only a handful of the most elite private companies, and we do not expect these to transact this year," Dingmann said. "We could still see a number of attractive private asset sales this year likely in the Permian, and then we would not be surprised to see some of the private bellwethers sold in 2024."
Mike O'Leary, a mergers and acquisitions attorney and partner with Hunton Andrews Kurth LLP, was part of the crowd that expected Devon Energy Corp. to make a deal, probably with Marathon Oil Corp., roughly a merger of equals.
O'Leary also said he thought Appalachian shale gas and liquids producer Antero Resources Corp. would be a buyer, although with Appalachian and Haynesville Shale driller Chesapeake Energy Corp. rumored to be looking at buying its neighbor Southwestern Energy, the shale gas menu might be smaller.
"Size matters in this environment, given the need for access to cash flow and capital and the costs of transitioning to cleaner production methods (including carbon capture), which increases the cost of production," O'Leary said in an email.
ConocoPhillips could be next buyer
ConocoPhillips will likely make a move soon to grow alongside its supermajor competitors, KeyBanc Capital Markets oil and gas analyst Tim Rezvan said. "ConocoPhillips looms as the lone wolf among large-cap US E&Ps with a big enough balance sheet to acquire a large-cap E&P; this keeps [Diamondback Energy Inc.] and [Matador Resources Co.] in play, in our view," Rezvan wrote in an Oct. 23 note.
"We see no rush for Diamondback to sell now ahead of organic de-leveraging, as it remains the last pure-play Permian [investment grade-rated] E&P standing, and one that has replenished inventory through $3 billion of bolt-ons in the last year," Rezvan said.
EQT could escalate
"A potential Chesapeake-Southwestern merger would create a new alpha dog for US natural gas production at 7.4 Bcfe/d," Rezvan wrote. "So the question for investors to ponder is this: Would EQT Corp. be content to be the #2 natural gas producer, or would it look to grow inorganically inside Appalachia (Gulfport, [Range Resources Corp.], Antero) or outside ([Comstock Resources Inc., Aethon United BR LP])?"
Rezvan said EQT could expand outside of Appalachia in the Haynesville Shale near the US Gulf Coast, as Southwestern and Chesapeake have done. "We see accommodative capital markets for a young CEO with a penchant for growth, as illustrated by the recently closed $5.2 billion acquisition" of private operator Tug Hill Operating LLC, Rezvan said.
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