Energy M&A Down Dramatically in Early 2019. Then Came the Chevron/Anadarko Deal.

U.S. oil and gas mergers and acquisitions hit a 10-year low during the first quarter of 2019, a downturn that, if it continues, could negatively affect revenue at the numerous Texas firms dependent on upstream M&A work.

But shortly after the end of the three-month period of unusually soft numbers, California’s Chevron Corp. announced it would acquire Anadarko Petroleum Corp., an energy company based in The Woodlands, north of Houston, in a deal valued at $33 billion.

Such is business in the cyclical energy sector, which is known for its boom-and-bust patterns, largely because the price of oil is so volatile.
Still, several Texas lawyers who do energy M&A said they stayed busy throughout the first quarter.

“M&A activity, at least what we are seeing, is keeping us pretty busy in the office right now. A lot of the upstream asset-level transactions have really slowed down, and that’s consistent with the data,” said John Greer, a partner at Latham & Watkins’ Houston office.

“I haven’t seen this drop in the number of deals affect my business that much,” said Brandon Durrett, a partner at Dykema Gossett in San Antonio.

Energy M&A totaled $1.6 billion during the first quarter, a record 10-year low, according to a report by data analytics company Drillinginfo. Deal volume in the first quarter was down 91 percent from the fourth quarter of 2018 and was 93 percent less than in the first quarter of 2018.

Andrew Dittmar, an M&A analyst at Drillinginfo, said a “confluence” of factors that began in late 2018 drove deal value down, including a drop in oil prices, and an Wall Street’s interest in shareholder return.

“The investors want to be paid back. They funded a lot of drilling,” Dittmar said.

He said those factors together removed the incentive for companies to go out and make deals.

“It’s always a tough time to find funding. They didn’t want to issue new stock, because the prices were too low. They didn’t want to issue any debt,” he said.

But then, on April 12, Chevron announced its Anadarko acquisition. Ratcheting up the tension, Occidental Petroleum Corp., of Houston, notified Anadarko on April 24, that it proposed a cash and stock offer valued at $57 billion, including the assumption of net debt and the book value of a non-controlling interest.

Shale Plays

Much of the 2018 energy M&A activity was in the Permian Basin and other shale plays.

Beginning in 2016, a wave of deals in the Permian Basin involved private equity companies building positions by buying assets, he said, adding that the PE companies are now selling those assets to public companies.

Because of that, Dittmar said, much of the shale assets in the Permian are now owned by public companies, which could prompt major oil and gas companies to acquire big players in the Permian, or lead to those big players, which include Pioneer Energy Services, Diamondback Energy and Concho Resources, to roll up some of the smaller companies.

“It’s going to be interesting,” Dittmar said.

Drillinginfo forecasts some second quarter rebound in oil and gas M&A. Texas lawyers doing energy M&A expect the same.

Durrett, of Dykema, said he has not experienced a decline in work in 2019 because he concentrates on middle-market deals as opposed to “watermark” deals.

“We focus on E&P company deals that range from $20 million to $200 million and those are pretty routine in the E&P sector nowadays,” he said.

But Durrett said the reason for a general decline in larger deals, which led to the precipitous drop in M&A value during the first quarter, is the “sustained middling price” of oil. He said it’s too low to motivate sellers but not low enough to spur asset write-offs.

Durrett said it’s an “interesting time” as larger firms that generally go after the mega energy deals are now competing for some smaller transactions. However, he said, he still has an advantage in getting that middle-market work because his firm offers lower billing rates.

There’s also been significant joint venture work to make up for the M&A lag, said Bob Gray, a corporate and securities partner in Mayer Brown in Houston.
“Right now I have four joint ventures I’m working on, either constructing or terminating,” Gray said, noting that joint ventures are good work because they are “very lawyer-intensive.”

“They aren’t big headline deals, but they are getting the business done,” Gray said.Greer, of Latham, and Stephen Gill, a M&A and capital markets partner at Vinson & Elkins in Houston, each said that while oil and gas M&A was down during the first quarter, a lot of deals are in the works, with companies just waiting for the right time to pull the trigger.

“There are a lot of conversations taking place with respect to corporate-level deals. They just haven’t come to the market yet,” Greer said, in predicting more deal announcements along the lines of Chevron/Anadarko, or perhaps smaller transactions as middle-market E&P companies look to beef up and obtain scale.

Gill said oil price volatility clearly has been a big factor in depressed M&A activity this year.

The price of a barrel of benchmark West Texas crude hovered between $60 and $70 through much of 2018, before dropping in the fourth quarter, hitting a low of $42.53 on Christmas Eve. It climbed back into the $60-plus range by April, a rise assisted by the Trump administration’s decision in late April to strengthen sanctions against oil-producing Iran.

Gill said that even though the price of oil improved during the first quarter of 2019, compared with late 2018, it’s hard to predict what commodity prices will do. But now that the price has recovered to the $60-plus range, Gill said, “lots of people” are considering strategic transactions.

“That’s what you saw with Chevron and Anadarko,” he said.

He said V&E’s energy M&A team has had a pretty good start to the year, and the team is expecting a busier summer in the upstream sector. He said there’s a need to consolidate assets in the Permian Basin and the Marcellus Shale.

“People just have to have the confidence to execute. That’s what it’s coming down to right now. They have to agree on valuation,” he said.
One plus for the energy M&A lawyers is V&E’s expansion of its shareholder activism practice—involving proxy contests and under-the-radar shareholder issues—including such work in the energy sector, he said. It can require expertise from energy M&A lawyers, Gill said.

He said if the energy business is in a downturn, like during 2014, there’s little activism, but the market is ripe now.

“When there’s choppiness, that’s when an activist comes in,” he said. “We have that phenomenon going on right now,” he said.

Reprinted with permission from the May 29, 2019 edition of Texas Lawyer © 2019 ALM Properties, Inc. All rights reserved. Further duplication without permission is prohibited.”