US Oil & Gas Review

Mergers and acquisitions in the US oil and gas industry continued their momentum in the second quarter as pressure grew on some producers to boost scale and production to compete with peers.

While US oil production is set to grow at a slower pace this year compared to the previous two years, while well costs are falling amid increasing efficiency, which is also driving a decline in upstream employment numbers in the top oil-producing state, Texas.   

In politics, the US presidential race changed months ahead of the vote in November, with President Joe Biden dropping out and Vice President Kamala Harris becoming the Democratic nominee to run in the election.

Bipartisan legislation was introduced in July, aiming to strengthen US energy security by accelerating the permitting process for critical energy and mineral projects of all types in the United States.

US Upstream M&A Frenzy Continues

In the second quarter of 2024, upstream mergers and acquisitions activity booked its third consecutive quarter of heightened value with more than $30 billion transacted, Enverus Intelligence Research (EIR) said in its latest M&A report.

The second-quarter tally brings year-to-date activity, including July deals, to nearly $90 billion and nearly $250 billion transacted in the last 12 months. Prior to the latest run of consolidation, quarterly M&A value had only topped $30 billion three times since the start of 2017, Enverus noted.

The biggest deal of the second quarter was ConocoPhillips’ announcement that it would buy Marathon Oil Corporation in an all-stock transaction with an enterprise value of $22.5 billion, inclusive of $5.4 billion of net debt.

Despite heightened scrutiny and additional requests for information from the US Federal Trade Commission (FTC), ConocoPhillips expects to close the deal in late 2024.

The deal, the fifth largest US upstream transaction of the last decade, contributed a lot to the overall Q2 M&A value.

The acquisition marks another historic name exiting the E&P space as Marathon Oil has roots that reach back more than 100 years. Unlike most other big deals in the current consolidation cycle that focused entirely on the Permian Basin, Marathon Oil held a diversified asset base that included Permian exposure along with large positions in the Eagle Ford and Williston Basin, Enverus notes.
 
“M&A momentum carried into the second quarter as pressure built on companies like ConocoPhillips, Devon Energy and SM Energy, that had previously stayed out of the market to keep pace with peers and grow in scale,” said Andrew Dittmar, principal analyst at EIR.

Due to high prices for prime Permian acreage, US exploration and production companies are now looking at mid-tier inventory and positions outside the Permian, notably in the Eagle Ford and Williston basins, according to Enverus.

Firms are also looking for opportunities to expand their inventory base by testing new zones such as SM Energy buying XCL Resources to gain access to Utah’s underdeveloped Uinta Basin.

“Proving up new economic drilling locations is a top priority for companies and has been the most cost-effective way to extend inventory life,” said Dittmar.

“What is substantially different in this market, and a major shift in the industry, is that companies like Matador Resources and SM Energy are willing to prepay for inventory in deals that has yet to be fully proven up by horizontal wells.”

In addition, private equity firms are capitalizing on the higher prices to sell portfolio companies, according to Enverus’ analysis.

While oil deals have been booming, natural gas transactions have been subdued because of low gas prices.

However, a potential rally in natural gas prices towards the end of 2024 and into 2025 “could generate a wave of deals as long-dated private equity investments rush to market,” Enverus said.

Efficiency Gains Push US Well Costs Lower

US well costs peaked in 2023 and are now set for a 10-percent drop this year as efficiency gains and lower prices for piping products, proppant, and diesel have combined to push costs down, Wood Mackenzie said in a report in July.

Still, further reduction will be difficult in the current pricing environment, as oilfield equipment and services companies (OSF) seek to keep margins high, the consultancy said.

Additional well cost cuts must come from even higher efficiency gains as the oilfield services providers are unlikely to reduce pricing, said Nathan Nemeth, principal analyst for Wood Mackenzie.

WoodMac’s analysts expect an additional 40 rigs will be active relative to current levels by the end for 2025, led by gas plays and the Permian basin.

However, faster drilling operations mute the need for more rigs and Wood Mackenzie estimates that a 5-percent improvement in drilling efficiency equates to about 28 fewer rigs needed in the market.

“The largest producers with the scale to commit to longer-term contracts (one to three years) for new equipment and technologies will realize additional efficiency gains and keep costs lower,” said Nemeth.

“Smaller producers will be most exposed to inflation headwinds — arguably motivating even more M&A activity in the region.”

Texas Upstream Employment Continues To Drop

Upstream oil and gas employment in Texas fell again in June, with a decline of 2,000 jobs compared to May, the Texas Oil & Gas Association (TXOGA) said in a cautionary note at the end of July, after newly released data from the Texas Workforce Commission indicated that the job count had dropped in 5 out of 6 months this year.

March 2024 was the only month in which the Texas upstream industry saw job gains in the first half of the year.

Commenting on the latest jobs data from the Texas Workforce Commission, TXOGA president Todd Staples said in a statement,

“Operational efficiencies are driving strong production with fewer rigs, which can translate to declining industry job numbers. Baker Hughes data indicate the national rig count has declined 14 percent from 687 in June 2023 to 588 active rigs in June 2024.”

At the same time, the US Energy Information Administration estimates rig productivity gains in excess of 20 percent year-over-year across major shale basins, with many companies maintaining or increasing production despite running fewer rigs.

“These productivity gains result in big benefits for consumers as prices have remained relatively stable despite geopolitical unrest,” TXOGA’s Staples noted.

Energy Permitting Reform Act

At the end of July, US Senators Joe Manchin (I-WV) and John Barrasso (R-WY), Chairman and Ranking Member of the Senate Energy and Natural Resources Committee, released the Energy Permitting Reform Act of 2024—bipartisan legislation aimed at strengthening American energy security by accelerating the permitting process for critical energy and mineral projects of all types in the United States.

“After over a year of holding hearings in the Senate Energy and Natural Resources Committee, thoughtfully considering input from our colleagues on both sides of the aisle, and engaging in good faith negotiations, Ranking Member Barrasso and I have put together a commonsense, bipartisan piece of legislation that will speed up permitting and provide more certainty for all types of energy and mineral projects without bypassing important protections for our environment and impacted communities,” Manchin said.

“For far too long, Washington’s disastrous permitting system has shackled American energy production and punished families in Wyoming and across our country. Congress must step in and fix this process,” said Ranking Member Barrasso.

“Our bipartisan bill secures future access to oil and gas resources on federal lands and waters.”

Added Barrasso,

“This legislation is an urgent and important first step towards improving our nation’s broken permitting process.”

The American Petroleum Institute (API), the biggest US oil and gas industry association, welcomed the proposed bipartisan legislation as a step to a more transparent and consistent permitting process.

“This legislation not only takes tangible steps toward a more transparent, consistent and timely permitting process, but also ends the administration’s misguided LNG export permit pause, strengthening American energy leadership while helping to reduce emissions worldwide,” said API Executive Vice President and Chief Advocacy Officer Amanda Eversole.

“We applaud Senators Manchin and Barrasso for renewing bipartisan efforts to build the infrastructure needed for today and the future, and we call on Congress to take up this urgent priority.”   

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