Enverus Intelligence Research (EIR), a subsidiary of Enverus, has published its analysis of upstream merger and acquisition (M&A) activity in the second quarter of 2024.
M&A Momentum Continues
Upstream M&A activity maintained its strong momentum, recording its third consecutive quarter of elevated value with over $30 billion in transactions.
This brings the year-to-date activity, including July deals, to nearly $90 billion, and close to $250 billion transacted over the past year. Prior to this recent consolidation trend, quarterly M&A value exceeding $30 billion had only occurred three times since the beginning of 2017.
Driving Factors Behind Increased M&A Activity
“M&A momentum continued into the second quarter as pressure mounted on companies like ConocoPhillips, Devon Energy, and SM Energy, who had previously refrained from participating in the market, to match their peers and expand their scale,” stated Andrew Dittmar, principal analyst at EIR.
“In the cases of ConocoPhillips and Devon Energy, running out of inventory doesn’t seem to be a major concern, but there’s still a perception that successfully navigating the maturing phase of shale requires building a resource base through M&A,” Dittmar added.
Impact of Megadeals
Similar to the first quarter, when Diamondback Energy acquired Endeavor Energy Resources, Q2 M&A value was heavily influenced by a single large transaction—ConocoPhillips’ acquisition of Marathon Oil for $22.5 billion. This deal marks the fifth-largest U.S. upstream transaction in the last decade, with another historic name, Marathon Oil, with roots tracing back over 100 years, exiting the exploration and production (E&P) space.
Shifting Focus Beyond the Permian Basin
Unlike most other major deals in the current consolidation cycle that centered exclusively on the Permian Basin, Marathon Oil held a diverse asset portfolio, including substantial positions in the Eagle Ford and Williston Basin, in addition to its Permian exposure.
Rising Inventory Costs and Refrac Potential
“The increasing cost of acquiring drilling inventory, particularly in the Permian, has been the dominant narrative in upstream M&A throughout 2024,” commented Dittmar.
“With premium pricing for the highest quality inventory, there’s been a scramble for mid-tier inventory that offers strong returns, even if it’s not as economically attractive as core Permian assets.”
An added benefit of acquiring assets in regions like the Eagle Ford and Williston Basin is the ability to leverage the potential of older horizontal wells by recompleting them through a process known as “refracs.”
In their investor materials, ConocoPhillips specifically emphasized the refrac potential in the assets acquired from Marathon Oil, while Devon Energy identified 300 refrac candidates.
The opportunity to revisit older wells is garnering increasing attention from companies, both within their existing assets and when evaluating potential deals. This heightened refrac potential is expected to stimulate further M&A interest in mature areas like the Eagle Ford and Williston.
Expansion Through Testing New Zones
Companies are also seeking opportunities to expand their inventory base by testing new zones.
Beyond the high prices in the Permian, SM Energy ventured into Utah’s underdeveloped Uinta Basin with its purchase of XCL Resources, driven by the belief that they can develop new productive intervals and expand the resource base to justify their entry price.
Prepaying for Unproven Inventory: A Market Shift
“Proving up new economic drilling locations is a top priority for companies and has been the most cost-effective way to extend inventory life,” noted Dittmar.
“What’s significantly different in this market, and a major industry shift, is that companies like Matador Resources and SM Energy are willing to prepay for inventory in deals that haven’t been fully validated by horizontal wells.”
Private Sellers and Changing Private Equity Landscape
A rising tide of inventory prices has benefited private sellers, who have capitalized on the market to divest over $100 billion in assets to public companies since the beginning of 2022.
Among private equity firms, EnCap Investments has been at the forefront, divesting roughly $20 billion since then, including nearly $10 billion in portfolio companies since early June.
Other prominent sellers during this period include Lime Rock, which invested in CrownRock, NGP Energy Capital, and Quantum Energy Partners.
This collection of companies, all energy-focused investment firms, reflects the evolving landscape of private equity in the oil and gas sector, as large, generalist firms have scaled back their involvement.
Family-Owned Companies and Potential Future Deals
The exceptionally strong market has also enticed long-held family companies like Endeavor Energy Resources, contributing $26 billion to total private sales, to exit.
A key question in the industry is whether more family-owned companies, notably Mewbourne Oil—now holding the most extensive privately owned Permian locations after Endeavor’s sale—will also be lured into the market.
A sales process by Mewbourne Oil would likely attract interest from all major companies active in the Delaware Basin, potentially even including EOG Resources, which hasn’t made a significant acquisition since purchasing privately held, family-owned Yates Petroleum in the Delaware Basin in 2016.
Potential for Further M&A Activity
There’s still potential for private equity firms 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 and Warburg Pincus, are two potential sellers in the Eagle Ford. Companies are also likely awaiting a rally in natural gas prices to divest more portfolio companies focused on that commodity.
Gas-Focused M&A and Future Outlook
With a few exceptions like Tokyo Gas acquiring Rockcliff Energy, and Chesapeake Energy merging with Southwestern Energy, gas-focused M&A has been subdued.
Low prices have hindered deals as potential sellers are hesitant to bring assets to market, especially as they anticipate higher gas prices driven by U.S. LNG exports.
A rally in natural gas prices towards the end of 2024 and into 2025 could trigger a wave of deals as long-term private equity investments are brought to market.
Non-Core Asset Sales and Future M&A
Beyond rising gas prices, increased non-core asset selling is another potential catalyst for M&A in the latter half of 2024.
“Historically, after a major wave of corporate consolidation like we’ve seen over the past 12 months, companies typically follow up by streamlining their portfolios and divesting less attractive assets,” concluded Dittmar.
“We should see some of this going forward from companies like Occidental, which have a specific mandate to reduce debt, but overall non-core asset selling will probably be relatively muted because operators don’t want to relinquish any hard-won inventory.”