The U.S. Energy Information Administration has forecast Brent crude oil prices will average $90 per barrel in February and nearly $88 per barrel by the first half of this year. Oil prices approached $100 per barrel at the beginning of the week on increasing prospects of war between Russia and Ukraine.
We asked four oil-and-gas partners: Will continued elevated oil prices lead to more deal activity in the upstream or midstream sectors or among large or mid-sized oil companies? Here are their responses.
Clint Rancher, partner at Baker Botts who was co-lead counsel to Cabot Oil & Gas Corp. on its $17 billion merger with Cimarex Energy Co. last year:
“Last year, global upstream M&A activity rebounded to pre-COVID levels, as the recovery of oil prices drove multibillion-dollar deals. This year, with oil prices expected to remain relatively elevated in the first half of 2022, we expect the consolidation trend to continue. Acquirers and targets with clean, post-bankruptcy balance sheets will make attractive merger partners. We expect the resulting companies to remain disciplined in their spending and to return capital to shareholders. ESG [environmental, social and governance] considerations will also continue to drive deal activity throughout the industry, as scrutiny from stakeholders and the Biden administration is expected to continue. To earn support, deals will have to make ESG sense as well as economic sense.”
Austin Elam, partner at Haynes and Boone and co-chair of its oil and gas practice group (who advised Earthstone Energy Inc. on its deal to acquire the assets of privately held Bighorn Permian Resources in the Midland Basin for $860 million last month):
“I would say that continued elevated oil prices will lead to more deal activity across the board and check all of the boxes you mentioned, for E&P companies and midstream companies alike. This is particularly true for Permian-focused gathering assets on the midstream side. But perhaps more so than elevated prices, continued pricing optimism and lessened, dramatic volatility are a larger player in both current and predicted deal volume.”
Michael Darden, partner-in-charge of Gibson Dunn’s Houston office and chair of the firm’s oil and gas practice group (who counseled Chief E&D Holdings on its $2 billion cash-and-share sale to Chesapeake Energy last month):
“Stable commodity prices (particularly at elevated levels) tend to lead to increased A&D [acquisition and divestiture] activity and increased development in the upstream space. Increased development, along with resulting volume increases, can have a follow-on effect on A&D in the midstream space. One big question is what E&P companies will do with increased revenues (resulting from increased commodity prices). Will they increase shareholder returns or put the increased revenues back into operations? The answer to that question will be a determining factor.”
Terry Radney, partner and co-chair of Locke Lord’s energy practice group (who co-led Enterprise Products Partners’ $3.25 billion purchase of Navitas Midstream Partners last month):
“We have already seen higher commodity prices leading to increased deal activity. We started seeing activity pick up in mid-2021 and it has continued into 2022 but not back to pre-pandemic levels. Many sellers have been waiting for increased commodity prices to test the market, and we are definitely seeing that now. The reports of the death of the oil-and-gas industry have been greatly exaggerated as we are definitely seeing much more interest in the space and more activity now. 2022 should be an active year.”