Billion Dollar Deals Break Out Across The Shale Patch

Just when it appeared the news in the energy world could not become any more hectic, two multi-billion dollar merger deals among big U.S. shale companies were announced within hours of one another. The “bigger is better” theme invoked in similar deals this year continues to game steam amid an increasingly uncertain business climate and evolving global energy crisis.

Tuesday first saw Denver-based Sitio Royalties announce that it had reached a definitive agreement to combine with Austin-based Brigham Minerals, creating a company that will boast a combined enterprise value of $4.8 billion. The company, which will continue under the Sitio Royalties name, will own almost 260,000 acres of leasehold, most of which resides in the Permian Basin, the most prolific and active shale oil and gas region on the planet.

In its release, Sitio’s management said that the combined company is “expected to benefit from a step-change in greater scale, enhanced margins, and increased access to capital, leading to accelerated consolidation potential, attractive returns and long-term value for stakeholders.” Andrew Dittmar, Director at Enverus, added in an email that such transactions are fundamental to growth among companies in the minerals and royalty space. “Since these companies don’t control the pace or scale of development on their properties, making acquisition is how they can drive production and cash flow growth to feed investor distributions,” he said.

Dittmar went on to say that “there has been less pressure to consolidate [in this segment of the industry] since they tend to already have low overhead costs and the need for operational synergies for development isn’t the same as other E&Ps. However, there are still benefits from having a larger presence in public markets as these companies look to reach out beyond the investors focused on this niche space to a broader audience.”

Of interesting note related to Sitio Royalties: Kimmeridge Energy, which has been highly focused on promoting a higher degree of ESG (Environment, Social, Governance) focus in the shale business, is a 43.5% owner of Sitio. Despite that fact, Sitio’s press release places little emphasis on ESG-related matters, perhaps an indicator of the increasing disfavor that cottage industry has fallen into as the global energy crisis has advanced during 2022.

A second multi-billion dollar merger was rolled out on Tuesday, as EQT Energy announced it had reached an agreement on a “strategic bolt-on acquisition” of THQ Appalachia I, LLC (“Tug Hill”) and THQ-XcL Holdings I, LLC (“XcL Midstream”) in a transaction valued at $5.2 billion. EQT President and CEO Toby Z. Rice said in a release that “The acquisition of Tug Hill and XcL Midstream checks all the boxes of our guiding principles around M&A, including accretion on free cash flow per share, NAV per share, lowering our cost structure and reducing business risk, while maintaining an investment grade balance sheet.”

In a separate email, Dittmar characterized the deal as “a significant vote of confidence on the ability of the Appalachian Basin to supply the U.S., and potentially even global allies, from a company deeply committed to the region.” Dittmar added that EQT has “stayed true to its roots in the Marcellus and Utica” basins while other Appalachian operators have sought recent mergers and acquisitions as means to diversify their asset bases into other regions of the country.

“The deal is the largest U.S. upstream transaction in about a year, since ConocoPhillip purchased Shell’s Permian assets for $9.5 billion in September 2021,” Dittmar added. “More significantly, it is the largest Appalachian deal in over five years, or since EQT purchased Rice Energy for $8.2 billion in summer 2017.” Notably, EQT’s acquisition of Rice Energy was the deal that brought Mr. Rice into the EQT organization.

Again, it is worth pointing out that, like Sitio’s release, the EQT release makes little mention of any ESG-related priorities. This marks a sharp departure from similar M&A announcements over the last several years in which acquiring companies went far out of their way to virtue signal their focus on such goals. Instead, the drafters of both of Tuesday’s releases seem to have been instructed to give strict focus to the financial factors that motivated the deals.

It’s always interesting to observe how priorities tend to change in the midst of a crisis. Virtue signaling is out; financial performance is in.