Green push to spotlight ESG metrics in US shale deals

Environmental concerns will play a bigger role when it comes to deal-making in the US shale sector this year as producers face growing scrutiny over emissions.

The carbon footprint will not be the driving force behind future mergers and acquisitions (M&A), but it is taking on an outsized influence on any potential tie-ups. "As boards are considering what deals to do, it is not enough that your deal makes financial sense," law firm Baker Botts partner Clint Rancher tells Argus. "Your deal has to make ESG [environmental, social and governance] sense also, and have a good story that can be told in addition to the economics."

The growing focus on ESG considerations comes as the pace of US oil and gas deals has eased up. About $8.6bn of upstream M&A were announced in the final three months of 2021, down by more than half from the $18.5bn reported in the third quarter, according to data provider Enverus. The slowdown follows a flurry of transactions in late 2020 and the first half of 2021 as heavily indebted producers sought to combine after the initial wave of the Covid-19 pandemic.

Large-scale deal-making may be on hold, but smaller asset sales lie ahead as buyers seek to fine-tune their portfolios. And, similar to last year, activity is likely to be dominated by the US' leading shale play — the Permian basin of Texas and New Mexico. For companies that are already looking to move into the Permian because of its high-quality inventory, the chance to boost their ESG credentials offers an added bonus, Enverus director Andrew Dittmar says. "The Permian is one of the best-performing areas in US onshore in terms of improving your ESG metrics," he says. "The financial objectives and ESG metrics are very complementary."

Leading US independent ConocoPhillips talked up the environmental attributes of its $9.5bn purchase of Shell's Permian basin assets last year. Chief executive Ryan Lance said at the time that the addition of "climate friendly" barrels would help improve the company's overall emissions profile. And a growing clamour for the majors and biggest independent operators to ditch high-carbon intensity assets may offer buying opportunities for smaller producers and private equity in particular, which are less susceptible to shareholder pressure.

The push to burnish green credentials extends to the oil field services sector, according to trade association the Energy Workforce and Technology Council (EWTC). "Companies that have been able to show that they have an offering that is viewed as positive in the energy transition environment, or a very positive ESG story, certainly are more attractive as acquisition targets," EWTC chief executive Leslie Beyer says.

Hazy emissions profiles

Consultancy firm Deloitte recently cited capital discipline among producers as the main reason behind the slowdown in upstream deals, but it also highlights the "limited visibility" for buyers into the emissions profile of sellers or their assets. "A large resource size and an attractive offering price may not be enough to elicit a response from a buyer focused on meeting its net zero targets," Deloitte says.

The absence of standardised reporting practices and lack of experience in modelling ESG risks are partly responsible. That may change, with the US securities regulator the SEC looking at requiring publicly traded companies to disclose more information to investors about their climate-related risks. Deals could also get a boost if banks start ESG score-carding, such as showing that the carbon intensity of one producer is lower than that of another, consultancy EY Americas Energy and Resources leader Mitch Fane suggests. "Then you might see some access to capital come back and buyers may have the opportunity to pick up some assets at affordable prices," he says.

By Stephen Cunningham