Oil and gas mergers continue in 2022, focused on increased profits in the Permian Basin

Oil and gas companies continue to merge frequently in 2021 and the trend continued early this year with operations focusing on the Permian Basin in southeast New Mexico and West Texas.

Most recently, Desert Peak Minerals and Falcon Minerals Corporation announced a $1.9 billion merger on Jan. 12 with the combined company focusing 73 percent of its oil operations in the Permian.

Company officials also touted a “significant” position in the Eagle Ford Basin in southern Texas.

More:New Mexico's oil and gas regulators seek more funds from lawmakers to fight pollution

In total, the deal resulted in a net acreage of 139,000 acres, with 105,000 in the Permian, expected to produce up to 14,500 barrels of oil equivalent per day during the first half of 2022.

Based in Denver, the new company will be managed by Desert Peak and its shareholders will own 73 percent of the new company while Falcon will own 27 percent.

Following the transaction, the company will have 20 wells expected to be productive within the next year, and Desert Peak Chief Executive Officer Chris Conoscenti said the focus on the Permian would drive up profits in the prolific and cost-effective region for oil production.

More:New Mexico to seek federal funds for cleaning up abandoned oil and gas wells

“We believe the ownership of Permian minerals and royalties is trending toward larger-scale, more efficient institutional ownership,” he said. “Our strategy is to be the leading consolidator of these high quality Permian assets.

“We believe our scale is a clear strategic advantage in the minerals business as we are able to drive down fixed costs per unit of production with each acquisition, enhancing our cash margins.”

Falcon CEO Bryan Gunderson said consolidating assets through the merger could help insulate the company from the fossil fuel market’s volatility while increasing the scale of operations.

More:Permian Basin solar farm green-lit by State of New Mexico. Will power oil and gas operations

“As we have previously communicated to our shareholders, we believe scale matters in the minerals business, as it enhances the ability to drive greater consolidation, improves access to capital, and reduces volatility caused by asset concentration,” Gunderson said.

“We are proud of the business our management team and employees have built, and we are excited to partner with Desert Peak to provide our shareholders with a significant increase in scale and exposure to a large and diverse base of premier assets across the Permian Basin.”

Spike in oil and gas mergers reported in 2021 amid COVID-19 recovery

The Desert Peak-Falcon merger followed a series of similar deals in 2021, as the market recovered from the COVID-19 health crisis and companies sought fiscal discipline and maximize returns rather than driving up production of oil and gas.

More:Oil and gas leads record $141.8 million in revenue for New Mexico Land Office last month

Global energy analytics firm Enverus reported mergers and acquisitions in the upstream sector of the oil and gas supply chain rose 25 percent last year for a total value of $66 billion.

That growth was approaching the $72 billion annual average reported between 2015 and 2019 but struggled to overcome the pre-pandemic levels, the report read, due to lingering market uncertainty created by the pandemic.

Between the third and fourth quarters of 2021, Enverus reported the value of mergers fell by 50 percent.

More:Permian Basin starts new year with more oil and gas deals, supply to meet demand in 2022

Andrew Dittmar, director as Enverus said the up and downswings in value were brought on by fewer but more impactful deals as companies sought to consolidate their assets by combining private exploration and production (E&P) companies.  

Before the pandemic, Dittmar said the market averaged 400 mergers and acquisitions a year, but reported 172 and 179 in 2020 and 2021, respectively.

“Since the emergence of COVID, upstream M&A has been characterized by fewer, but larger, deals,” Dittmar said. During 2020 that took the form of public companies consolidating amongst themselves and in 2021 transitioned to a focus on rolling up private E&Ps.”

More:Recovering and cracking down: Here are New Mexico's top oil and gas stories of 2021

The top five deals in the final months of 2021 saw about $6.6 billion in value, with two of the top five based in the Delaware Basin – the western sub-basin of the Permian in southeast New Mexico.

The top deal in the fourth quarter of last year was Continental Resources buying out Pioneer Natural Resources’ Permian assets for about $3.3 billion on Nov. 3, followed by a $604 million merger between Earthstone Energy and Permian-based Chisholm Energy on Dec. 16.

The other top deals were focused on the Haynesville Basin in southeast Arkansas, Louisiana and east Texas and the Mid Continent Basin which spans several states in Southwest and Midwest United States.

More:Texas oil company spends $600M on Permian assets in New Mexico. Omicron threatens market

Together, Enverus reported the Permian and Haynesville regions accounted for about 80 percent of the fourth quarter’s deal value, with the Delaware primarily focused on oil and Haynesville leading in natural gas transactions.

Baker Hughes report both regions leading in production as well as Haynesville and the Permian were reported oil and gas rig counts with 52 and 293, respectively.

New Mexico and Texas maintained their top slots among oil- and gas-producing states with New Mexico holding steady in the last week at 95 rigs and Texas adding seven for a total of 281 as of Friday, per Baker Hughes’ latest data.

More:Federal government seeks input on how to spend $250 million to clean up abandoned oil wells

The growth in rigs followed an upswing over the weekend in the price of domestic oil as the Chicago Mercantile Exchange reported a value above pre-pandemic levels at about $84 per barrel.

Dittmar said both the Permian and Haynesville regions were characterized by heavy past investments from private companies now looking to sell the assets to drive up revenue.

“Buyers have been largely focused on adding high-quality inventory to build out their runway and sustain the strong cash flow generation recently achieved,” Dittmar said.

“The largest supply of inventory meeting buyers’ criteria is available for sale in the Delaware for oil and the Haynesville for gas. That is largely because both these plays had significant private investment in prior years that the sponsors are now looking to monetize via sales to a public company.”

Adrian Hedden can be reached at 575-618-7631, achedden@currentargus.com or @AdrianHedden on Twitter.