Chevron's DJ deal may spur more M&A

Chevron's surprise corporate acquisition last week expanding its position outside the Permian basin could encourage other deals that have been slower to see the light of day.

The $6.3bn purchase of independent producer PDC Energy elevates Chevron's Colorado Denver-Julesburg (DJ) basin business into one of the oil major's top-five assets for production and free cash flow, building on its existing position acquired during the $5bn takeover of Noble Energy in 2020. Chief executive Mike Wirth noted an improved climate for deals, with oil prices off their highs from six months ago, which might pave the way for others to follow.

Although the highly prized inventory on offer in the Permian basin of west Texas and eastern New Mexico is still likely to attract the most interest from buyers, albeit at higher valuations, other shale plays have seen their fair share of mergers and acquisitions (M&A) this year. Of the $8.6bn of upstream US deals reported in the first quarter of 2023 (see chart), more than half involved the Eagle Ford basin of south Texas, according to Enverus Intelligence Research, which sees this trend as an outlier.

Flush with cash after last year's oil price rally, and fearful of running out of drilling site inventory as concerns mount over depleting reserves, publicly traded producers are looking to bulk up and extend their runway of future drilling locations. At the same time, private equity is seeking an exit from the sector after hanging onto assets, in some cases, for too long.

"We have seen quite a bit of deal activity from some private equity sellers," says law firm Baker Botts partner Jon Platt, who recently advised on Matador Resources' $1.6bn acquisition of private-equity backed Advance Energy Partners. "The buyers have mostly been public companies looking for additional inventory, if you're just looking at the Permian," says Platt, who spoke in general about the outlook for M&A. "There have been quite a few of those deals that have already transacted this year, and there are several more deals in the pipeline that we expect to transact this year as well."

One of the more active private equity sellers in the Permian has been EnCap Investments, which offloaded Midland basin assets to independent producer Ovintiv for $4.3bn last month. As part of the same deal, EnCap snapped up Ovintiv's Bakken assets in North Dakota for $825mn.

As well as seeking to cash in on assets that it previously struggled to dispose of, private equity has also been engaged in fundraising efforts. In April, upstream producer FireBird Energy II said it had secured more than $500mn in equity commitments from Quantum Energy Partners to invest in oil and gas assets in the Permian, with a primary focus on the Midland. The company is the successor to FireBird Energy, which was sold to Diamondback Energy for $1.6bn late last year.

Must concentrate

With shale production growth set to plateau around the end of the decade, the argument for more deals has taken on a new urgency. At the same time, any uptick in M&A could further slow output in the short term, as some operators opt to line up drilling locations for future use rather than tap them straightaway, while they focus on boosting cash flow. That is the case with Ovintiv, which plans to cut the number of rigs at its newly acquired Permian assets from seven to two.

And despite previous rounds of M&A, the oil and gas sector is still viewed as highly fragmented, bolstering the need for further consolidation. "I've said repeatedly, there are too many players sitting in this space," ConocoPhillips' chief executive officer, Ryan Lance, said last month.

By Stephen Cunningham

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