Author: Mark Young

Upstream capex hits five-year high despite significant cuts to cash flow in U.S. and Canada

North America’s oil and gas capital expenditure is at a five-year high despite significant cuts to operating cash flow caused by lower per barrel prices.

Evaluate Energy has created a study group of 87 U.S. and Canadian domestic-focused companies to examine quarterly changes in cash usage, a key barometer of how oil and gas companies feel about the present market and their confidence in the future.

Around $25 billion in capex was deployed in Q1 by these domestic producers excluding all M&A activity – the highest level of spending per quarter since 2018, and the tenth consecutive quarterly increase.

Evaluate Energy’s streamlined cash flow data helps uncover some of the key reasons why.

Free cash flow is still high

Producers have seen operating cash flow decrease significantly in recent months. Q1 2023 saw $42 billion generated by the study group – around $20 billion less than just under a year ago.

Despite this, U.S. and Canadian producers continue to increase exploration and development capital spending.

The fact is Q1 2023 was still a relatively bumper quarter for both operating and free cash flow – the difference between operating cash flow and capital expenditures.

Since the start of 2018:

  • Only periods in 2022 saw higher operating cash flow than Q1 2023
  • Free cash flow hovered around $17 billion. Pre-pandemic, no quarter even got close to hitting $10 billion.

Debt is not a factor

Importantly, company debt is largely under control. A deeper dive into the data illustrates this change over time.
For sure, debt was the focus in late 2020 and early 2021. As producers emerged from the pandemic, they tackled immediate debt problems and it’s less of a priority now.

  • Debt was intensely tackled at 37% of all cash used in Q3 2021; the only quarter over five years where debt management outranked all other cash usage.
  • The percentage of cash for debt dropped sharply to 16% in Q3 2022. It dropped below 10% in Q1 2023, the first time post-Covid.

Plenty of cash for dividends and buybacks too… for now

Q1 2023 saw 35% of all cash used for dividends and buybacks. This is slightly down on the quarterly average since Q3 2022, but way above the five-year average of 22%.

Capex is on the rise while dividends and buybacks absorb a substantial and sustained portion of cash.

Evidently, free cash flow is yet to hit levels where promises made over shareholder returns conflict with capital spending plans. There is clearly plenty of cash for both.

If operating cash flow continues to drop to the point that something must give, it would be interesting to see how producers react.

For now, though, there is no conflict. Producers are pressing on in a big way.

Evaluate Energy’s streamlined cash flow data, including detailed breakdowns of all uses and sources of cash, provide our users with a far clearer picture than ever before of how oil and gas producers use their cash as commodity prices change over time. Data points include capital expenditures, finance raised, debt repaid, assets sold or acquired, dividend payments and more. 

 

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$1 billion-plus cash-based mergers increasingly common in upstream sector

High value corporate mergers in the global upstream sector are becoming increasingly cash based.

Based on 2023 merger deals valued at over US$1 billion, all but one agreed by publicly listed companies worldwide have included cash as part of the transaction.

This is in stark contrast to 2020 and 2021 during the pandemic, where cash played a much smaller role, said Eoin Coyne, Senior M&A Analyst at Evaluate Energy.

For more on Evaluate Energy’s M&A data, click here.

“The percentages here for cash-based deals in 2022 and 2023 would be normal if we were looking at asset deals or acquisitions by private companies, but it’s highly unusual for corporate mergers of this value by public companies.

“There is just so much cash on-hand for larger producers. Last month’s $4.9 billion all-cash acquisition of Neptune Energy by Eni and Var Energi in Europe was the latest example.”

This is not to say that stock-based deals aren’t happening at all, however, added Coyne.

“Chevron’s agreement to acquire PDC Energy is an all-stock arrangement and ranks as 2023’s largest upstream deal so far. And when we looked at data for corporate acquisitions by public companies valued at less than $1 billion, all-stock deals have held at a long-term average of between 25-40% in both 2022 and 2023.”

Evaluate Energy’s M&A database holds every upstream deal worldwide since 2008, allowing daily comparisons of key metrics, corporate valuations and changes in spending behavior over time. For more on our data, which also includes data on downstream, midstream, service sector and renewable energy M&A activity, click the button below. 

 

Return to https://blog.evaluateenergy.com for more from Evaluate Energy

 

Q4: Private company deals continue to dominate upstream M&A in North America

Private companies’ predominance in North American upstream M&A continued in Q4 2022 based on Evaluate Energy’s latest deal analysis.

Evaluate Energy’s new infographic shows that 81% of all global deal value – in an especially lacklustre quarter for dealmaking – was spent on North American assets, and that private companies were involved in the five highest-value U.S. and Canadian deals.

  • The U.S. deals included the highest value Q4 deal worldwide that will see Continental Resources taken into private ownership, as well as acquisitions by Marathon Oil and Diamondback Energy.
  • In Canada, the oilsands sector saw its first +$1 billion quarter in the post-pandemic era, fuelled by the $950 million acquisition of Greenfire Resources by M3-Brigade Acquisition III Corp.

“Acquisitions of private operators by public companies remain a key trend, in part due to a lack of appetite for oil and gas IPOs, which blocks a key monetization route for private operators,” said Eoin Coyne, senior M&A analyst. “Equally, private operators have been looking to monetize investments while oil and gas prices are relatively high.”

Evaluate Energy’s latest M&A infographic can be downloaded at this link.

Included within the infographic:

  • More details on these private company deals
  • Why global deal activity fell to record lows based on several metrics in Q4 and 2022 overall
  • Evaluate Energy’s 2023 outlook for upstream M&A
  • Regional breakdowns of all Q4 activity

 

 

Majors make $22 billion in global E&P asset sales so far this year

The world’s largest E&P companies have been extremely active in selling assets this year according to analysis available in Evaluate Energy’s latest M&A infographic.

Evaluate Energy’s data shows that over $22 billion has been raised by oil and gas majors – public companies with an enterprise value of over $10 billion – since the start of 2022 by selling assets or stakes in their upstream portfolios.

“There have been 46 individual deals with majors selling assets since the start of the year across 17 countries, with a large number of assets sold to private equity buyers,” explains Eoin Coyne, Evaluate Energy’s Senior M&A Analyst.

While sales have been frequent, acquisitions have been thin on the ground.

“The current price environment is seemingly steering these producers towards sales and potentially furthering development of existing core assets and away from any kind of widespread acquisition activities,” said Coyne.

“Investment in renewable energy sectors has also been growing.”

Evaluate Energy’s Q3 infographic provides detailed information on asset sales by Repsol, ExxonMobil and Shell, among others.

Upstream M&A hits $22 billion in Q2 2022 in another modest quarter of activity

High oil and gas prices continue to stifle market activity when it comes to E&P deal-making.

Evaluate Energy’s latest infographic focuses on upstream M&A in Q2 2022 – and is available to download free here. It details a total of $22 billion in new deals; albeit, the second consecutive quarter with historically modest activity levels.

“Q2’s $22 billion is an uptick over last quarter but 35% down on the five-year average total per quarter, with high prices the primary driver,” said Eoin Coyne, senior analyst at Evaluate Energy. “As we saw in Q1, buyers seem unwilling to make deals at top-of-the-market prices, while sellers have little impetus to part with assets contributing to healthy profits unless a strong offer is made.”

The infographic expands on these and other external pressures that may be hindering activity, while also providing information on:

  • All the major Q2 deals
  • The largest U.S. merger of 2022
  • The active role now taken by private companies
  • Canada’s most active quarter of deal-making since Covid-19 hit
  • Activity in Qatar related to the single largest LNG project in history

Upstream M&A falters in Q1 2022 high price environment

Agreeing M&A deals has proven to be difficult for E&P companies in early 2022.

Upstream Q1 deal values are 47% down on the five-year quarterly average as rising commodity prices alter the market dynamic for buyers and sellers, according to new analysis.

Evaluate Energy’s latest M&A report – available for free download here – shows that just $19 billion in new upstream deals were agreed in Q1. This represents a significant decline in activity despite surging oil and gas prices and continued relaxations of Covid restrictions around the world. Q1 saw WTI hit a peak of $123 per barrel, while gas prices rose sixfold in parts of Europe.

“The prices have created a market where buyers and sellers are reluctant to act. Total deal values are 54% down on the prior quarter and 47% down on the five-year quarterly average,” said Eoin Coyne, Senior M&A Analyst at Evaluate Energy and report co-author.

“Deal counts also fell significantly. Potential selling companies have lacked impetus to part with assets contributing to healthy profits unless a very strong offer is delivered, while buyers are wary to match valuations at what is potentially the top of a price cycle.”

Evaluate Energy’s latest M&A report provides further analysis on the impasse between buyers and sellers in the current market, as well as information on the key deals that were agreed in Q1.

Included in the report:

  • U.S. deals dominate the global deal value with Permian assets popular targets
  • Private companies are cashing in on U.S. assets acquired during the downturn
  • Two supermajors realign their African portfolio in deals totaling around $2 billion
  • Canada’s activity limited in tough market, with Vermilion agreeing the only +$100 million deal

Over 4 million boe/d of production traded as deal values bounce back in 2021

Global upstream deal values within oil and gas returned to pre-pandemic levels in 2021, while the largest volume of production changed hands in more than a decade, according to new data from Evaluate Energy.

The recovery in M&A was driven by rising demand and prices following a year of under-investment in new supply, said Eoin Coyne, Evaluate Energy’s senior M&A analyst.

“2021 saw $144 billion in new upstream deals agreed,” said Coyne, co-author of Evaluate Energy’s latest annual M&A report. “This value is 53% higher than the spend in 2020 and in line with the five-year average annual spend prior to 2020.”

The report – available here – analyses the biggest deals of 2021, including green energy deals and investments agreed by traditional oil and gas majors.

“The fact that overall spend for the year was in line with the non-Covid average annual spend hides just how much upstream M&A took place in 2021,” added Coyne, who co-authored the report. “Over 4 million boe/d of production changed hands around the world, which is the largest total since Evaluate Energy began tracking M&A deals in the oil industry 14 years ago.”

Included within the report:

  • Woodside, Santos and BHP undertake multibillion-dollar international mergers
  • Pioneer, ConocoPhillips and Continental Resources make Permian acquisitions as Shell exits
  • Gas companies join the consolidation wave in the U.S.
  • Canadian deals are headlined by the merger of ARC Resources and Seven Generations, and the Cenovus asset sale program
  • Shell, Eni and Chevron are among E&P majors to make significant green energy sector investments in 2021

 

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Permian Basin sees US$30 billion of upstream M&A in just 6 months

Evaluate Energy’s latest M&A report shows that between the start of April and the end of September, the Permian Basin in the United States saw almost US$30 billion in new M&A deals announced for E&P assets.

“After a bumper quarter in Q2 that saw over US$18 billion in new deals agreed, Q3 saw just under US$12 billion of its own,” said Eoin Coyne, report author and Senior Analyst at Evaluate Energy.

The vast majority of this Q3 spend came from ConocoPhillips acquiring the Permian assets of Royal Dutch Shell for US$9.5 billion in cash.

“ConocoPhillips had already made a major move with the $13 billion acquisition of Concho Resources during Q4 2020,” said Coyne. “That was an all-stock deal, so ConocoPhillips retained enough liquidity to fund this latest transaction with available cash.”

The other ~US$2.5 billion in Permian deals this quarter included deals by Callon Petroleum, Lime Rock Resources and a royalty interest acquisition by Viper Energy Partners.

For more on these deals and other U.S., Canadian and global upstream M&A activity in Q3 2021, download Evaluate Energy’s latest M&A report at this link.

Top U.S. Upstream Deals in Q3 2021 (Permian deals in bold)

Eni, Shell lead oil producers in green energy deal making in 2021

Eni and Shell have been the most active among traditional oil and gas producers when it comes to green energy sector deal making in 2021, according to a new report from Evaluate Energy.

Over the past few years, intense and consistent investor pressure over carbon usage and climate goals has prompted many E&P companies to explore options in greener energy sectors and diversify their portfolios.

Evaluate Energy’s new report includes a rundown of every upstream deal in Q3 2021 and details on green energy investments by oil and gas producers. It is available for download at this link.

Eni’s busy third quarter is the reason for its position atop the rankings.

“Four of Eni’s six green energy deals were announced between July and September,” said Mark Young, report co-author and Senior Analyst at Evaluate Energy. “These latest investments will see the company acquire Italy’s second largest operator in the electric vehicle charging space, as well as increase its European wind and solar operational capacity by over 650MW.”

Shell joins Eni with six investments made up to September 30.

“Early activity from Shell this year was also mainly focused on European markets, but its two most recent investments have both been in the U.S.,” said Young. “These two U.S. deals included the acquisition of a renewable energy residential retailer and a sustainable fuels producer.”

Details on all of Q3’s major green energy investments by Eni, Shell and other upstream companies are available as part of Evaluate Energy’s latest M&A report.

Note for chart: “Other” includes deals in the following sectors, among others: Biomethane, Geothermal, Hydro, Retail power from renewable energy, Green energy-related technology.

Upstream M&A rises to $44 billion in Q3 2021

Evaluate Energy’s latest report shows that upstream M&A spending reached $44 billion around the world during Q3 based on deals announced between July and September.

This total is:

  • 23% higher than $36 billion in Q2; and
  • 25% higher than average quarterly spending over the past five years.

Spending was supported by strong prices for oil and gas.

“Oil demand increases reflected a resurgent global economy and a relative lack of supply from either the free market or OPEC+,” said Eoin Coyne, report author and Senior Oil & Gas Analyst at Evaluate Energy. “This led to an average WTI price in Q3 of $70.23, the highest quarterly average price since 2014. Natural gas saw an even more acute imbalance. Parts of Europe saw record natural gas prices and Henry Hub price averages in the U.S. hit $4.19, an increase of 47% on the average price in Q2.”

Despite the increase in deal value on previous quarters, the overall activity level was unchanged.

“What we refer to as ‘significant deal counts’ were identical in Q3 and Q2,” Coyne said. “Thirty-five deals were valued at greater than $50 million in both quarters. Larger corporate deals and higher valuations for asset deals due to increased oil and gas prices accounted for the overall higher deal value in Q3.”

Evaluate Energy’s M&A report for Q3 2021 includes analysis on the following:

  • Permian Basin deals involving Shell, ConocoPhillips, Callon Petroleum and more
  • Spartan Delta’s continued growth in Canada and a recent spike in royalty interest acquisitions involving Topaz Energy and PrairieSky
  • Multibillion-dollar deals affecting the natural gas industry in Australia and Brazil’s ultra-deepwater oilfields
  • Green energy sector deals involving Shell, BP, Eni and Galp