Consolidation has been an ongoing theme in energy with several examples of deals this year across subsectors. The desire for scale and energy companies having extra cash on hand add to a conducive environment for dealmaking. Though commodity prices are weaker this year relative to 2022, the macro environment remains solid, which can be supportive of transactions. Consolidation is a natural evolution for a maturing industry and is likely to continue in the energy sector over time as companies pursue accretive transactions to enhance their businesses. Today’s note looks at recent acquisition announcements by the subsector and some of the factors motivating deals.
Midstream: More Parent Consolidations of MLPs and Rare M&A Among Unrelated Parties
Consolidation within the midstream space has largely involved C-corp parents buying in their MLPs to simplify the structure. This began in 2014 with Kinder Morgan’s (KMI) roll-up of its three entities. Then there was a wave of consolidation in 2018-19. The trend of MLP buy-ins by parents has continued into 2023. In May, MLPs Holly Energy Partners (HEP) and Green Plains Partners (GPP) received acquisition offers from their parents. Last month, Phillips 66 (PSX) completed its acquisition of DCP Midstream.
Outside of consolidation by parents, there have been examples of midstream companies buying private companies or assets from private companies (read more). Earlier this year, Energy Transfer (ET) bought Lotus Midstream in a cash and stock deal valued at $1.45 billion. Last year, Enterprise Products Partners (EPD) acquired Navitas Midstream, and Targa Resources (TRGP) bought Lucid Energy. Both deals had price tags above $3 billion.
M&A among public third parties has been more limited, which added to the surprise surrounding the announcement of ONEOK’s (OKE) proposed $18.8 billion acquisition of MLP Magellan Midstream Partners (MMP).
Bucking the trend of consolidation, TC Energy (TRP) announced plans last week to spin off its liquids business into a new company. The separation is expected to allow both companies to better execute the opportunities presented by their different business lines and to enhance value for shareholders. The transaction, which is expected to be tax-free for U.S. and Canadian holders of TRP, should close in 2H24 subject to shareholder approval and favorable tax rulings.
Oil and Gas Producers Go Shopping for Drilling Inventory
For oil and gas producers, M&A activity tends to be centered on adding to their drilling inventory. The Permian in West Texas and New Mexico is a hotbed for deals given the quality of the resource base (read more). In April, Matador Resources (MTDR) acquired Advanced Energy Partners from EnCap Investments for ~$1.6 billion, expanding its Permian footprint. Colorado producer Civitas Resources (CIVI) is entering the Permian by acquiring assets of portfolio companies managed by NGP Energy Capital Management. The deal will add 800 high-quality drilling locations for CIVI.
Earlier this year, Exxon (XOM) was reported to be in early talks with Pioneer Natural Resources (PXD), which boasts an enviable Permian position with more than 20 years of high-return inventory. A deal with PXD has not materialized. However, this month, XOM announced the acquisition of Denbury Resources (DEN) in a $4.9 billion all-stock transaction. DEN’s asset base will ultimately enhance XOM’s carbon capture and sequestration business. XOM repurchased $4.3 billion in stock in each of the first two quarters of 2023, and shares issued for the DEN acquisition should be more than offset by repurchases this year.
Similarly, in May, Chevron (CVX)announced it was acquiring PDC Energy (PDCE) in an all-stock deal valued at $6.3 billion. PDCE’s assets are largely in Colorado’s DJ Basin with a smaller position in the Permian. The acquisition is expected to increase CVX’s proven reserves by 10%. CVX, which has a $75 billion buyback authorization, is expected to issue 41 million shares for the deal. In 1H23, CVX repurchased nearly 50 million shares. In other words, the shares issued for the transaction are essentially offset by two-quarters of repurchases. 
Others have been adding to their Permian footprint while pruning their portfolio elsewhere. Ovintiv (OVV) is acquiring assets in the Permian’s Midland basin from portfolio companies of EnCap Investments while exiting its Bakken position in North Dakota. OVV noted that the assets will add approximately 1,050 drilling locations. Similarly, Callon Petroleum (CPE) added to its Permian position recently, while selling its Eagle Ford assets in Southeast Texas.
Oilfield Services See Consolidation as Well
In the oilfield services space, ProFrac (ACDC) has completed a number of acquisitions over the past year or so, including the stock-for-stock acquisition of US Well Services. Most of ACDC’s other targets were private companies. Last month, Patterson-UTI Energy (PTEN) and NexTier Oilfield Solutions (NEX) announced an all-stock merger of equals. Then in July, PTEN announced the acquisition of private drill bit company Ulterra Drilling Technologies. Scale, integration, and/or diversification of business lines or geographies can all be motivations for acquisitions in the services space.
Strengthened balance sheets and a decent macro backdrop have supported dealmaking in the energy space this year. The trend of consolidation is likely to continue in the energy sector over time as a natural progression for a maturing industry and as companies seek accretive opportunities to enhance their asset base.
 Chevron has not been permitted to repurchase shares since PDCE’s proxy solicitation on July 7. Buybacks are expected to resume after the acquisition closes in August.
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