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Analyst expects more consolidations and less natural gas production growth for 2020

Rigs drill sites in the South Central Oklahoma Oil Province near Chickasha in 2018. Analysts expect the current drilling slowdown to persist in the Anadarko Basin. [THE OKLAHOMAN ARCHIVES]
Rigs drill sites in the South Central Oklahoma Oil Province near Chickasha in 2018. Analysts expect the current drilling slowdown to persist in the Anadarko Basin. [THE OKLAHOMAN ARCHIVES]

Changing dynamics in the shale-dominated U.S. oil and gas industry are prompting predictions of a surge in company consolidations and a significant easing of natural gas production growth.

Enverus, an on-demand software and data analytics company that follows the industry, made those predictions recently as part of evaluations it provides to clients.

Potential sellers within the industry, Enverus states as part of its mergers and acquisitions analysis, continue to face tough capital-access conditions this year and may be willing to accept lower buyout values.

And the analysis also states potential buyers — larger companies that spent the past year cutting costs and boosting efficiencies — are turning the corner by generating free cash flows, instituting dividends and buying back shares to reward investors.

At the same time, their stock prices are rising because of those operational improvements and tailwinds from an improving global economic picture and rising oil prices.

As investors grow more confident in a company’s ability to deliver on free cash flow, they also become more open to acquisitions, provided asset quality is high and the price is reasonable, Enverus’ market analysis states.

In addition, larger exploration and production companies should be better positioned to deliver on returns to investors by leveraging economies of scale, more efficient development and more favorable service and midstream contracts.

“We saw an uptick in December in the pace of deals and more positive investor reactions to acquisitions,” said Andrew Dittmar, Enverus’ senior mergers and acquisitions analyst. “That should bode well for mergers and acquisitions in 2020.”

Enverus’ analysis noted shale company consolidations happen through acquisitions by multi-national companies or mergers among the smaller to midsize players like was seen in 2019.

Enverus tracked $96 billion of U.S. oil & gas mergers and acquisitions in 2019, including $11 billion in the year’s final quarter.

The biggest deal of the year, Occidental’s $57 billion acquisition of Anadarko, was the largest of the decade and the fourth largest ever.

Outside of that, there were $39 billion in deals in 2019.

Most of 2019’s marquee deals focused on the Permian Basin. After Occidental/Anadarko, 2019’s largest corporate deals were Callon’s $2.7 billion merger with Carrizo, WPX’s $2.5 billion buy of private Felix Energy II, and Parsley’s $2.3 billion acquisition of Jagged Peak.

Enverus stated WPX’s $2.5 billion acquisition of Felix in December 2019 was notable for several reasons. Besides being the largest deal of the fourth quarter, the acquisition proved that “built to sell” private equity portfolios can still work.

“Challenges for one company can mean opportunity for someone else and we’re seeing that on the private capital side,” said John Spears, Enverus’ market research director.

“In the last 10 years, we watched U.S. shale upend global energy markets and transform the U.S. into a net energy exporter,” Dittmar said. “We’re now at an inflection point where shale matures from a growth industry to one that generates dividends and share buybacks for its investors. Completing that transition and setting the stage for the next 10 years will likely require a round of consolidation and 2020 sets up the needed pieces for this to occur.”

Natural gas

As for natural gas, an analysis Enverus released in December predicts production growth for the fuel will average about 2 billion cubic feet per day in 2020, compared to growth of between 8 billion and 9 billion cubic feet per day each of the previous two years.

It predicts the nation’s gas storage system will end the withdrawal season at between 1.7 trillion and 2 trillion cubic feet, effectively holding its average price to about $2.50 per million British thermal units this year.

The analysis focuses on three specific basins.

Pipeline expansions in the Marcellus and Utica shale fields helped provide outlets for gas growth there in 2019, but the region is expected to continue to battle with capacity constraints this year, especially during low demand periods.

As for the Haynesville basin, most growth there during 2019 came from private operators that had the highest-quality reserves and the lowest break-even pricing for the production. Enverus expects that trend will continue in 2020.

In the Permian, the third-quarter activation of Kinder Morgan’s Gulf Coast Express pipeline added nearly 2 billion cubic feet per day of takeaway capacity.

Even so, Enverus estimates the pipeline’s capacity was quickly filled, leaving constraints on the potential for future growth, given that new capacity won’t arrive in the basin for a least a year.

The report doesn’t make a prediction about whether 2020 production growth of natural gas in the Anadarko Basin will slow.

However, Brad McPherson, Enverus’ Oklahoma director, anticipates seeing the same trend in the Sooner State even with the expected activation of the Midship Pipeline, which has the capacity to carry up to 1.44 million dekatherms (about 1.44 billion cubic feet) of natural gas daily out of the basin to the Gulf Coast.

McPherson expects to see fewer wells drilled and produced across the state in 2020. He said that, combined with normal production declines from shale wells and decisions by natural gas producers to shut in their wells, will impact Oklahoma’s production.

“It is really more about production than it is pricing,” McPherson said. “The one thing that concerns me the most as an oil and gas professional and as an Oklahoma citizen is that natural gas production has a whole lot to do with our gross production taxes, and how those receipts impact Oklahoma’s economy.”

Related Photos
<strong>A rig drills a Permian Basin location for WPX Energy in 2017. WPX's $2.5 billion buy of private Felix Energy II was among the biggest acquisitions in 2019.</strong>

A rig drills a Permian Basin location for WPX Energy in 2017. WPX's $2.5 billion buy of private Felix Energy II was among the biggest acquisitions in 2019.

<figure><img src="//cdn2.newsok.biz/cache/r960-1e3ec9498adc440a53a22072c314d6f9.jpg" alt="Photo - A rig drills a Permian Basin location for WPX Energy in 2017. WPX's $2.5 billion buy of private Felix Energy II was among the biggest acquisitions in 2019. " title=" A rig drills a Permian Basin location for WPX Energy in 2017. WPX's $2.5 billion buy of private Felix Energy II was among the biggest acquisitions in 2019. "><figcaption> A rig drills a Permian Basin location for WPX Energy in 2017. WPX's $2.5 billion buy of private Felix Energy II was among the biggest acquisitions in 2019. </figcaption></figure><figure><img src="//cdn2.newsok.biz/cache/r960-6358923964d47284d96db0b0b298be77.jpg" alt="Photo - The Westdale compressor station, part of Enable Gas Transmission's Carthage to Perryville pipeline, is pictured. A lack of projects currently being built to add capacity is expected to combine with low prices to slow the growth of natural gas production across the nation in 2020. " title=" The Westdale compressor station, part of Enable Gas Transmission's Carthage to Perryville pipeline, is pictured. A lack of projects currently being built to add capacity is expected to combine with low prices to slow the growth of natural gas production across the nation in 2020. "><figcaption> The Westdale compressor station, part of Enable Gas Transmission's Carthage to Perryville pipeline, is pictured. A lack of projects currently being built to add capacity is expected to combine with low prices to slow the growth of natural gas production across the nation in 2020. </figcaption></figure><figure><img src="//cdn2.newsok.biz/cache/r960-089c672a6a6d7bdb8d0498c3c7451da0.jpg" alt="Photo - Slug catchers are seen at the Enable Midstream Partners South Canadian Gas Plant facility in Calumet. " title=" Slug catchers are seen at the Enable Midstream Partners South Canadian Gas Plant facility in Calumet. "><figcaption> Slug catchers are seen at the Enable Midstream Partners South Canadian Gas Plant facility in Calumet. </figcaption></figure><figure><img src="//cdn2.newsok.biz/cache/r960-08be6fdd23a38e7d6719e3236d128eb3.jpg" alt="Photo - Enable Midstream Partners South Canadian Gas Plant facility is shown in Calumet. " title=" Enable Midstream Partners South Canadian Gas Plant facility is shown in Calumet. "><figcaption> Enable Midstream Partners South Canadian Gas Plant facility is shown in Calumet. </figcaption></figure><figure><img src="//cdn2.newsok.biz/cache/r960-c1d221dc829fd9f5ea506ed7c5fcfc17.jpg" alt="Photo - Rigs drill sites in the South Central Oklahoma Oil Province near Chickasha in 2018. Analysts expect the current drilling slowdown to persist in the Anadarko Basin. [THE OKLAHOMAN ARCHIVES] " title=" Rigs drill sites in the South Central Oklahoma Oil Province near Chickasha in 2018. Analysts expect the current drilling slowdown to persist in the Anadarko Basin. [THE OKLAHOMAN ARCHIVES] "><figcaption> Rigs drill sites in the South Central Oklahoma Oil Province near Chickasha in 2018. Analysts expect the current drilling slowdown to persist in the Anadarko Basin. [THE OKLAHOMAN ARCHIVES] </figcaption></figure>
Jack Money

Jack Money has worked for The Oklahoman for more than 20 years. During that time, he has worked for the paper’s city, state, metro and business news desks, including serving for a while as an assistant city editor. Money has won state and regional... Read more ›

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