Cash-rich US oil producers are looking for deals after a long M&A dry spell

US oil producers, showered with cash after a year of record profits, are scrambling for deals as concerns mount that the shale field’s best wells are becoming scarce, preparing the sector for a wave of consolidation.

Bankers and lawyers have reported a sharp surge in activity in recent weeks as buyers and sellers from across the sector mobilize teams for a flurry of deals after a long dry spell – particularly in Texas and New Mexico’s sprawling Permian Basin, the most productive oil field in the world World .

“There’s going to be a lot of M&A in 2023,” said Pete Bowden, global head of energy banking at Jefferies and one of the industry’s top dealmakers.

“They’re out there buying for more inventory. And we are back to selling Permian companies with prime locations to sophisticated parties at real valuations.”

The expected M&A boom is the latest sign of the robust health of the US oil and gas industry, which has posted record profits on the back of high energy prices fueled by the Russian invasion of Ukraine.

US shale producers made a record more than 150 billion last year. Oil majors have paid off tens of billions of dollars in debt over the past year and have plenty of firepower to do business, bankers said.

The expected deal boom is being driven by many producers’ fears they are running out of prime acreage as yields from new wells plummet after a decade of frenetic drilling.

The sector remains highly fragmented, with dozens of operators ranging from single-rig private drillers to supermajors carving up the largest shale fields. Companies are looking for competitors with the best remaining drilling prospects.

“If you can buy resources at a reasonable value and you have the balance sheet and the money to do so, you will do so at these prices,” said Muhammad Laghari, senior managing director of investment banking at Guggenheim Partners.

The expected upside follows just 13 deals in 2022, the lowest since 2005, according to consultancy Enverus. At $58 billion, the total was 13 percent down year-on-year and a fifth below pre-pandemic levels as oil prices fluctuated wildly – and natural gas prices made it difficult to close deals.

There were a handful of big ticket deals late last year. Diamondback and Marathon Oil each spent $3 billion to acquire land in the Permian and Eagle Ford Basins. About $5 billion in other deals were made across the industry in January, including Matador Resources’ $1.6 billion purchase of private-equity-backed Permian drilling company Advance Energy, which bankers say is indicative of the warming of the market.

Vitol, the world’s largest independent oil trader, beat out a host of big names to buy privately held Delaware Basin Resources last month.

It’s not just buyers who are eager to do business. Vendor appetites are also increasing, both public and private actors. Private equity groups have launched funding rounds while trying to exit previous high-priced investments.

“We expect to certainly see more of this activity starting in Q2 and beyond, particularly in private equity, as we hear – and see – that the energy private equity fundraising windows appear to be opening said Preston Bernhisel, an M&A partner at the law firm Baker Botts.

Bankers said smaller listed oil and gas producers, particularly those with a market value of less than $10 billion

“We’re seeing more and more small and mid-cap companies have limited options to buy or sell, so mergers may be the best solution to increase scale and relevance,” Laghari said.

With oil prices stabilizing at around $80 a barrel and the industry generally price bullish, companies are more price optimistic than last year, narrowing bid-offer spreads.

“There is a good match between the needs of buyers and the needs of sellers at the moment. They just need a little bit of price cooperation to get the deals done,” said Andrew Dittmar, analyst at Enverus.

The deals bonanza will likely be limited to oil, bankers said. Natural gas prices have fallen sharply from peaks in 2022 of around US$10 per million British thermal units to around US$2.50 per million BTU, making producers less keen to sell at what they see as low prices .

Gas producers are also increasingly under scrutiny by competition authorities after a wave of consolidation among operators in the prolific Appalachian shale gas basins. Buyers are awaiting the outcome of a Federal Trade Commission review into a proposed $5.2 billion buyout of THQ Appalachia by EQT, the country’s largest producer.

But in the oil sector at least, bankers, lawyers and investors said it’s a matter of if, not when, a serious dealmaking glut will hit.

“I don’t know what that first precursor is going to be — what’s going to be the guideline — that’s going to say, OK, the door opens,” said Buddy Clark, a partner at the Dallas-based law firm Haynes and Boone. “But once it opens – you’ve seen it if you’ve seen it 100 times – it’s going to come in with a tide.”