Over the last year, deal activity in the Eagle Ford Shale was relatively steady, picking up towards the end of 2019 and carrying into early 2020. The recent uncertainty caused by the coronavirus pandemic and the Saudi-Russian oil production level conflict, however, has hindered M&A activity in the region, and frankly everywhere else. WTI closed below $23/bbl on March 18 with futures prices indicating a depressed price environment persisting for the near term. Although deal count has decreased as of late, the M&A landscape has the potential to ramp up as some companies will need to sell assets in order to bolster their balance sheets amid the challenging commodity price environment, though wide “bid/ask” spreads between buyers and sellers may be difficult to overcome.
Recent Transactions in the Eagle Ford
A table detailing E&P transaction activity in the Eagle Ford over the last twelve months is shown below. Relative to 2018, deal count decreased by six transactions and the average deal size declined by roughly $650 million.
Ensign Natural Resources Entering, Pioneer Natural Resources Existing
Ensign Natural Resources made its first acquisition as a company in May of 2019, acquiring Eagle Ford acreage from Pioneer Natural Resources. Brett Pennington, President and CEO of Ensign, explained that the assets included meaningful production and attractive drilling inventory. Pioneer on the other hand, was ready to become a pure-play Permian operator. In total, Pioneer has sold approximately $1 billion of assets located outside the Permian Basin. Pioneer seemed to make it clear that they are throwing all of their eggs in one basket.
Callon Petroleum Expanding their Footprint
The biggest deal, in terms of dollars, was Callon Petroleum’s acquisition of Carrizo Oil & Gas. Callon, a Permian Basin focused company, expanded its position in the Permian and entered the Eagle Ford with the acquired acreage. The deal terms had to be revised after significant investor pushback. The amended agreement stated that Callon shareholder would own approximately 58% (up from 54% initially) of the combined company and Carrizo shareholders will own approximately 42% (down from 46% initially). It should be noted that this deal is not pure Eagle Ford shale. Carrizo’s asset details included 76,500 acres in the Eagle Ford with roughly 600 undrilled locations and 46,000 acres in the Delaware Basin with about 1,400 undrilled locations. The combined assets will include 120,000 net acres in the Permian and 80,000 net acres in the Eagle Ford. The core positions in the Permian and Eagle Ford plan to produce over 100,000 boe/d of pro forma production. Joe Gatto, president, and CEO of Callon, explained his vision of the larger company, which is to employ a more efficient scaled development model that aims to drive a lower cost of supply. The multibillion-dollar merger officially closed in December of 2019, and now seems like unfortunate timing due to the current price environment.
Repsol S.A. Picking Up Where Equinor Left Off
Equinor, a Norway based petroleum refining company, agreed to sell its Eagle Ford assets to Repsol for $325 at the end of 2019. The agreement gives Repsol, a Spain headquartered oil & gas company, 100% control of the asset while making them the operator. In 2017, Equinor took an $850 million impairment on the asset due to lower than expected output. In 2018, Equinor also released that part of their acreage lies on areas with high water stress variables. Repsol expressed that the acquisition will give their producing assets portfolio a boost while taking advantage of operating synergies and efficiencies. The acquisition is also aligned with Repsol’s intentions to expand in North America. The deal plans to increase total production for Repsol in the Eagle Ford to approximately 54,000 boe/d.
M&A transaction activity in Eagle Ford was fairly consistent throughout 2019, as companies focused to acquire valuable acreage with production potential. However, no one can ignore the tough current conditions in the energy industry. Acquisitions that closed at the end of last year seem like the least of worries, as companies are simply trying to avoid bankruptcy. If conditions allow only the strongest to survive, it could lead to an increase in transaction activity ahead.
We have assisted many clients with various valuation needs in the upstream oil and gas industry in North America and around the world. In addition to our corporate valuation services, Mercer Capital provides investment banking and transaction advisory services to a broad range of public and private companies and financial institutions. We have relevant experience working with companies in the oil and gas space and can leverage our historical valuation and investment banking experience to help you navigate a critical transaction, providing timely, accurate and reliable results. Contact a Mercer Capital professional to discuss your needs in confidence.