M&A Activity and Other 2021 Energy Trends: Q3 Oil and Gas Industry Update

Commodity price drivers

Oil prices showed another gain in September, with West Texas Intermediate (WTI) crude closing the month at $75.03 per barrel (/bbl), increasing 2% from the second quarter and nearly 87% year-over-year. Similarly, Brent crude finished September at $78.52/bbl, up 5% from its June close and more than 91% from the previous September.

On October 13, the US Energy Information Administration (EIA) updated its short-term energy outlook (STEO), highlighting ongoing uncertainty driven by the global pandemic, although the EIA remains bullish. Brent crude prices are forecasted to average approximately $81/bbl during the fourth quarter of 2021, projected at $10/bbl higher than the prior quarter. The outlook reflects expectations that global oil inventories will fall at a faster rate than previously expected due to a lower global oil supply in late 2021 across a range of producers. In 2022, the EIA expects growth in production from oil-producing countries and that the growth will outpace slowing global oil consumption trends. The production increase will also likely influence current Brent crude prices to decline to an annual average of $72/bbl. The EIA forecasts rising crude oil production to 11.3 million b/d in December and the average for 2022 trending upward to 11.7 million b/d.

For ten of the last twelve months, US energy producers added to the rig count as oil prices climbed to their highest mark since 2018. As of September 24, the Baker Hughes rig count summary shows a total active US rig count of 520, comprised of 421 oil rigs and 99 gas rigs. This represents an increase of 49 oil rigs and one gas rig from June, and a year-over-year increase of 262 rigs (238 oil rigs and 24 gas rigs) compared to the previous September.

Industry updates

The Railroad Commission of Texas’ latest reports revealed the number of drilling permits nearly doubled compared to the previous September, showing a total of 801 original drilling permits in September. This includes 714 permits to drill new oil or gas wells, four to re-enter plugged wellbores, and 77 for re-completions of existing wellbores.

Restructuring updates

According to Debtwire’s Data on Transactions report, six Chapter 11 bankruptcy cases occurred in the energy sector during the third quarter of 2021, a favorable trend compared to the seven cases filed in the previous quarter.

Texas-based Pogo Energy, LLC, an electrical power company specializing in generation/transmission, filed for Chapter 11 bankruptcy in July. Pogo Energy reported liabilities in the range of $10 to $50 million. Downstream Oil and Gas company Limetree Bay Services, LLC also filed for Chapter 11 bankruptcy in July; in its filing, it reported assets in the range of $1 million to $10 million and total liabilities of between $500 million and $1 billion.

During August, Basic Energy Services, L.P. and its affiliates filed for Chapter 11 bankruptcy in the Southern District of Texas. The organization reported $100 to 500 million in assets and $500 million to $1 billion in liabilities.

Three organizations filed for Chapter 11 bankruptcy in September, including JAB Energy Solutions II LLC, an oilfield service company, which reported $16.9 million in liabilities; Tellus Energy, an oil and gas operating company based in Ridgeland, Mississippi, which reported $129.0 million in liabilities; and Rockdale Marcellus, LLC, an oil and gas company specializing in evaluation, acquisition, and development of conventional oil and gas properties and unconventional resources in the Marcellus, also filed for Chapter 11 bankruptcy and reported $100 to $500 million worth of assets and $100 to $500 million in liabilities.

M&A activity, capital markets, and capital projects

After hitting a two-year high in the prior quarter, US dealmaking in the oil and gas sector declined, according to Enverus, which noted that merger and acquisition (M&A) deals conducted during the third quarter were 44 percent lower than the total value of deals the previous quarter. At $18.5 billion, the third quarter numbers remain higher than the five-year average of $16 billion for the quarter, excluding the Occidental/Anadarko tie-up.

Mergers and acquisitions

In July, Kinder Morgan, Inc. announced plans to acquire Indianapolis-based Kinetrex Energy, a Midwest-based supplier of liquefied natural gas (LNG) that also focuses on producing and supplying renewable natural gas (RNG) under long-term contracts to transportation service providers.

The same month, Brookfield Infrastructure Partners raised its hostile takeover offer for Inter Pipeline Ltd. for a second time to Can$8.6 billion (equal to US$6.9 billion) as it battles a rival bid from Pembina Pipeline Corp. Pembina has made an all-stock bid of Can$8.3 billion, while Brookfield had offered Can$8.5 billion, with an all-cash option.

Dominion Energy and Warren Buffett’s Berkshire Hathaway Energy have agreed to terminate a planned sale of Questar Pipelines. One reason for terminating the deal included uncertainties regarding antitrust concerns that could be raised by the Federal Trade Commission.

Houston-based Callon Petroleum Company failed to win over investors after announcing its biggest-ever acquisition to increase its footprint in the Delaware Basin. In early August, Callon agreed to purchase Primexx Energy Partners Ltd. for about $788 million. It also separately agreed to swap debt for equity with Kimmeridge Energy, which is Callon’s largest shareholder.

In August, Chesapeake Energy Corporation revealed plans to rapidly increase cash flow and generate annual savings averaging $50 million by announcing plans to purchase its rival Vine Energy Inc for $615 million, which is focused on the Haynesville basin.

Shifting focus to clean energy by exiting the largest US oilfield, Royal Dutch Shell PLC announced in September that it would sell its Permian Basin assets to ConocoPhillips for $9.5 billion. The deal is ConocoPhilips’ second sizable acquisition within a year centered on the US shale industry, and American and European producers appear to hold divergent opinions regarding whether to focus on hydrocarbons going forward.

Capital projects and clean energy

In North Dakota, Resources Group, Inc. began construction on a natural gas pipeline expansion project that will enable 250 million cubic feet/day of natural gas to be transported from the Bakken Formation to major portions of Montana, Minnesota, South Dakota, North Dakota, and Wyoming. The Federal Energy Regulatory Commission gave the green light for construction to proceed in July.

In mid-July, Portuguese renewable energy firm Greenvolt announced it had raised funds for an expansion via an initial public offering which marked the largest IPO on the Portuguese stock exchange since 2014 and values the company above 500 million euros ($586 million). Expansion plans include solar parks and wind farms based in Europe.

August marked a successful first deployment of an advanced electric fracturing solution announced by Halliburton Company and VoltaGrid LLC, which combined an all-electric fracturing spread from Halliburton with an advanced power generation system from VoltaGrid. The solution seeks to reduce emissions and provide fuel savings and represents the first pad in a multi-year contract with Chesapeake Energy Corporation, and the project plans include more than 140 stages in the Marcellus shale formation.

BHP Group publicized plans to spend $544 million to develop its Shenzi North oil project in the Gulf of Mexico, and announced in August that it will move forward to the design and engineering phase of its Trion oil project in Mexico. BHP operates Shenzi North and holds a nearly three-quarters stake in the deepwater oilfield, and it intends to add two wells and underwater equipment to achieve production capacity equaling around 30,000 b/d. In August, Transocean received an award from BOE Exploration & Production LLC  for a $252 million firm contract for the new ultra-deepwater drillship, the Deepwater Atlas.

Several other announcements occurred in August. One of Canada’s biggest oil producers and refiners, Imperial Oil Ltd, announced that it plans to use its refinery in Strathcona to process vegetable oil into renewable diesel. The project requires final approval and aligns to the goals set by majority-owner Exxon Mobil intending to produce more low-emissions fuels by 2025. Next, Sarawak Shell Berhad, a subsidiary of Royal Dutch Shell PLC, noted a commitment to power Malaysian offshore platform, the Timi field, with solar and wind energy. In addition, China’s Sinopec Corp announced significant spending plans related to hydrogen energy, noting it will spend billions on hydrogen by 2025 as the organization seeks to become a carbon-neutral energy provider by 2050.

Based in the Permian Basin, Diamondback Energy Inc unveiled plans in September to end routine flaring (the process of disposing of unwanted gas) by 2025 and other initiatives that seek to improve the producer’s environmental performance. It previously announced an initiative in which all hydrocarbon molecules produced by Diamondback starting in 2021 and thereafter will be produced with zero net Scope 1 emissions. The company intends to achieve this by purchasing carbon offsets and continuing to reduce its Scope 1 emissions footprint. Laredo Petroleum Inc. also joined the responsibly sourced gas (RSG) movement with a new partnership with Project Canary, in which the oil and gas producer is initiating a continuous emissions monitoring pilot and RSG certification at select well sites and development areas in Texas.