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Upstream M&A near average in Q3, but no increase expected soon

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Upstream M&A near average in Q3, but no increase expected soon

Even with independent producers tightening their budgets and investors punishing companies who acquire new assets, M&A activity in the upstream oil and gas segment still managed to stay in line with recent averages in the third quarter.

According to a report by Austin-based Enverus, there were more than $17 billion worth of M&A transactions in the third quarter, slightly lower but still within striking distance of the quarterly average of $19 billion from 2016 to 2018. Enverus reported 10 deals made during the third quarter, but more than half of the $17 billion came in two deals: BP PLC's $5.6 billion selloff of its Alaska assets and Callon Petroleum Co.'s approximately $3.2 billion all-stock acquisition of Carrizo Oil & Gas Inc. The small number of deals, the firm said, is evidence of how difficult the debt markets have become for upstream companies to navigate.

"Most public E&Ps are highly limited in access to external capital right now," senior M&A analyst Andrew Dittmar said. "Shale companies are turning to deals as another option in the toolbox to bridge the gap to free cash flow and hopefully shift market sentiment back in their favor."

Private equity firms have also largely stayed on the sidelines, with involvement in just one deal worth approximately $925 million in the third quarter.

"Private equity looks to be largely sticking to their script from prior quarters and cautiously deploying capital on deals secured with significant cash flow," Enverus Market Research Director John Spears said.

Unlike most recent quarterly updates, M&A activity was not dominated by moves in the Permian Basin. While the Callon-Carrizo deal is centered on the acquisition of Carrizo's Permian assets, Callon will also be taking on holdings in the Eagle Ford Shale as well. Other deals involved assets in the DJ Basin, the Haynesville and Marcellus Shales and Uinta Basin. Only three of the 10 deals were centered solely on acquisitions in the Permian.

With oil prices remaining below $60 per barrel and both investors and lenders remaining chilly to upstream companies, Enverus said it expects M&A activity to remain a difficult proposition in the fourth quarter. While most observers believe consolidation is needed in the upstream segment, few companies are positioned well enough to handle a potential stock-damaging backlash from angry shareholders.

"There is a broad consensus that corporate consolidation is positive for the industry," Dittmar said. "While the benefits are there, getting the right deal in place is challenging. Companies that match up on asset fit are needed, as well as a low premium to avoid a buyer selloff. Conversely, targets have to be convinced on the long-term upside since an immediate payoff isn't evident." Producers appear much more interested in trying to woo back investors with reduced capital spending and increased free cash flow than trying to add to their asset base.

"Current company valuations show a strong investor preference for E&Ps with clean balance sheets and established capital returns from dividends or buybacks versus high growth. That may translate to little appetite for making acquisitions among most independent public E&Ps," Enverus said.