Bonanza Creek Energy’s acquisition of Extraction Oil & Gas, which emerged from chapter 11 in January, and their ensuing purchase of Crestone Peak Resources illustrate a shift in the North American oil patch.
The deals, which consolidated the largest pure play upstream energy companies in Colorado's Denver-Julesburg (D-J) Basin, underscore two important factors now at play.
First, thanks to a 60% rise in crude prices in 2021, it is easier to make the math work outside of the Permian Basin, the home in west Texas and northern New Mexico of low-cost production. It also means producers that have restructured following a period of retrenchment begun in 2017 are attracting buyers.
It’s a far cry from the midst of the pandemic. Then, deal making almost exclusively happened in the Permian, where producers can break even below USD 20 a barrel. It also mostly involved strong companies looking to get even stronger in the play, not those having restructured through bankruptcy.
Black ink over black gold
Over the years, onshore US oil and gas deal flow has mostly tracked the price of crude. But in late 2017, as companies climbed out of another oil price crash, a shift happened. Upstream companies that had been focused on ramping up production were told to live within their means, with debt markets tightened by lenders tired of bankruptcies and shareholders wanting to see profitability.
That focus on cash flow was painful and led companies into bankruptcy, a process accelerated by the pandemic.
For many outside of the Permian, crude needed to be in the 40s to pencil out. Some saw USD 60 as a point where shell-shocked producers would find enough cushion to be comfortable making deals again.
Thanks to the post-pandemic recovery, the price of West Texas Intermediate (WTI) crude surpassed USD 75 in early July, a mark not seen since late 2014. That has created the economics for more deals.
A gusher on the way?
Companies emerging from bankruptcy are likely targets. Taking debt off the books made Extraction’s math for profitability much more manageable, attracting Bonanza Creek. Other companies that can similarly benefit from a clean start include Whiting Petroleum, Chesapeake Energy and Sable Permian.
Non-core divestitures from deals done in 2019 and 2020 could reach the market soon too. Occidental Petroleum's Rocky Mountain assets acquired from Anadarko Petroleum, Devon Energy's assets outside of the Permian, and Chevron's D-J Basin position acquired with Noble are all logical candidates.
Single-basin consolidation also will drive deals. The Eagle Ford, Haynesville and Williston plays are all highly fragmented, and the Permian deals showed that the market rewards building large, contiguous positions in a play and drilling your best rock.
As oil prices grow, deals will flow.
