Mergers and acquisitions (M&A) in the US oil and gas business have been subdued in the past year, as companies balanced the many unknowns with the invasion in Ukraine and recovery from Covid-19 restrictions. Baker Botts partnersClint Rancher and Doug Gettenspoke with Argus about the outlook for US energy M&A deals and initial public offerings in 2023. Edited highlights follow:
What's the outlook for upstream M&A in 2023 compared with this year?
Rancher: 2022 started out with a valuation gap between buyers and sellers based on Ukraine, and uncertainty about how long those elevated prices were going to persist.
And so even if deals made sense, sellers were looking for much higher valuations for assets than buyers were willing to pay, just based on their confidence in higher commodity prices for longer.
Some of that gap has narrowed as prices have stayed elevated. We've seen more interest in the space generally over the second half of the year.
Will we see a return of blockbuster deals?
Rancher: In 2023, you will have upstream companies with stronger balance sheets than anyone has seen in many years.
A lot of E&Ps are exploring a path of paying down debt, right-sizing their balance sheet and returning cash to shareholders. As the market gets more comfortable with higher prices over the longer term, then what you could see is a return to kind of the traditional paradigm, which is that higher energy or higher commodity prices mean higher deal flow.
Which shale basins will see most activity?
Rancher: The Permian is going to continue attracting investments. You'll also see action in the Rockies and North Dakota in 2023.
What will be the main drivers of M&A?
Rancher: You will continue to see larger companies try to divest of dirtier assets. In the near term, companies will look to secure supply and continue returning cash to shareholders.
With the energy transition, [using M&A to] become cleaner and greener with your asset base is a secondary or longer-term goal for many.
What about the outlook for oil and gas initial public offerings?
Getten: Three upstream IPOs being filed here in the fourth quarter of this year is a very good signal as far as activity in the equity capital markets is concerned.
Probably these are deals that are not 2022 deals but 2023. I'm aware of other deals that we here at the firm are working on that are being prepared, all in the upstream space, to try and execute an IPO in the early part of next year.
What's the backdrop to the improved IPO landscape?
Getten: We're kind of heading into 2023 in a recessionary environment but commodity prices seem to be holding up and E&P companies seem to be delivering and building their business model by delivering free cash flow. So it seems to be potentially a counter-cyclical investment. You're not seeing a lot of IPOs right now, and the outlier in the IPO market are upstream companies.
In the IPO market, the activity we're going to see is in energy companies —upstream particularly — but also some renewables businesses that are also looking to go public, especially in light of the Inflation Reduction Act. That is another area where investors may have an appetite to put their money.
Is Continental Resources being taken private by its founder a one-off?
Getten: I don't expect to see a lot of companies follow the Continental/Harold Hamm model just because E&P companies are a tough candidate for a leveraged buyout. Continental was unique in that Hamm already owned a majority of the shares, so he was taking private a small part.
Going private is hard if you don't have a very wealthy founder with liquidity that's not going to put a bunch of debt on the business.
With the S&P 500's exposure to energy companies increasing, some of the valuation issues we have seen may correct themselves.
