Investor activism may trigger more mergers and acquisitions (M&A) in US onshore shale this year, lead by UK-Australian resources firm BHP's proposed multi-billion dollar divestment of its US assets.
But the M&A outlook for 2018 is markedly different from last year, when a record number of deals were struck, with appetite for unconventional acreage less clear-cut. The upstream sector had a renewed appetite for risk in 2017, whereas focus this year has shifted to capital discipline, positive returns and on operations that can sustain themselves within existing cash flows, consultancy PwC says. It expects this shift to continue to reshape the US onshore M&A market as it did in the first quarter, yielding a higher number of deals but at lower values.
A total of 63 deals were announced in the first quarter, up by just under a fifth from a year earlier, but the overall value of the transactions fell by 44pc to just under $41bn. The largest US upstream mergers in January-March included Concho buying RSP Permian for $9.5bn, TPG Pace Energy capturing Enervest for $2.7bn, and private investor Apollo Global acquiring SM Energy for $1.35bn.
Elliott pressures BHP
BHP is selling its US onshore portfolio following a push by activist investor Elliott Associates. The firm plans to sell its shale business at the end of this year — six months earlier than planned — aiming to benefit from resurgent oil prices and US corporate tax cuts, chief executive Andrew Mackenzie says. BHP announced the sale last year, after writing down most of the $20bn it spent acquiring them since 2010. The company is open to a demerger or an initial public offer (IPO) but would prefer to sell its seven asset packages in one go or in groups for cash or swaps, Mackenzie says. BHP is expected to make $8bn-$10bn from the sale. "The environment is supportive, both from a price point of view and geopolitically," Mackenzie says.
BHP's US onshore assets covering 800,000 acres (3,240km²) produce around 200,000 b/d of oil equivalent (boe/d). The firm owns about 250,000 acres in the Eagle Ford shale, 93,000 in the Permian basin, 206,000in the Haynesville in Louisiana, and 287,000 in the Fayetteville in Arkansas. The number of wells BHP owns that are economic at oil and gas prices below $50/bl and $3/'000ft³, respectively, have more than doubled to 1,420 from May 2016, US bank JP Morgan says.
BHP's Permian assets followed by those in the Eagle Ford are likely to be the most sought after. Both independents and majors are under shareholder pressure to lower debt and improve returns, so analysts point to a potential joint bid by a private equity firm and a major such as Shell, BP or Chevron — for which the diversified package may appeal. Shell could lift its US onshore output to 630,000 boe/d by 2020 from 270,000 boe/d last year, if it were to make a private equity backed bid, with a joint-venture model ensuring that the "transaction can co-exist with Shell's buy-back programme", JP Morgan says.
No such thing as Icahn
Beleaguered US independent Sandridge Energy has put itself or some of its assets up for sale, after activist investor Carl Icahn gained control of the board last month. Sandridge has signed 26 confidentiality agreements with interested parties, 10 of which are keen on a takeover and 16 on just its North Park basin assets in Colorado. A further three agreements are under negotiation. The bidders include US independent Midstates Petroleum, which had an earlier attempt to buy Sandridge rejected. Icahn began to seek control of the board following that rebuff. He also challenged Sandridge's $746mn plan to buy Denver-based Bonanza Creek Energy last year over the value. And Sandridge may attract interest from private equity investors given their increased participation in the sector.
