2018 has been a stellar year in energy mergers and acquisitions (M&A), thanks to mega deals such as Marathon Petroleum’s (MPC - Free Report) buyout of Andeavor and Energy Transfer LP’s (ET - Free Report) simplification transaction.
From upstream to midstream to downstream, the M&A activities came from all facets of the oil and gas sector. While a number of companies struck deals to increase scale and be competitive, some transactions were driven by the need to simplify corporate structures and others with the intent of bringing diversification across products and geographical coverage.
Here is an overview of the 5 major proposed energy deals from 2018:
1. Marathon Petroleum-Andeavor
The $35 billion merger between oil refiner Marathon Petroleum Corporation and Texas-based rival Andeavor, announced on Apr 30 and closed on Oct 1, is one of the highest valued deal among energy firms in recent times. The transaction created the largest U.S. refiner in terms of refining capacity, surpassing Valero Energy. The new Marathon Petroleum also created a nationwide refining giant in terms of market capitalization, taking over the crown from Phillips 66.
The deal expanded the geographical footprint of Marathon Petroleum in attractive markets, bolstering its foothold in the Permian Basin, thereby creating an enviable retail and marketing portfolio.
2. Energy Transfer Equity-Energy Transfer Partners
In August, pipeline and midstream operator Energy Transfer Partners LP agreed to merge with its general partner Energy Transfer Equity. The $27 billion unit-for-unit exchange, which saw Energy Transfer Equity change its name to Energy Transfer LP, created a larger and stronger energy MLP.
The transaction – concluded on Oct 19 – was aimed at simplifying the organizational structure and boost the credit profile of the partnership, along with improving transparency. With a diverse base of assets that comprises crude, liquids and natural gas pipelines along with terminal and midstream operations, the merged entity will be able to reach key supply basins and markets.
3. Concho Resources-RSP Permian
Mergers in the upstream space picked up pace when Concho Resources Inc. (CXO - Free Report) signed a deal in March to acquire its rival RSP Permian Inc. in an all-stock deal of $9.5 billion, to expand its presence in the prolific Permian play. The deal was completed in July.
The Concho Resources’ buyout of RSP Permian has added 92,000 acres of complementary holdings to the former’s Permian portfolio, expanding the company’s total acreage in the prolific oil play to 640,000 net acres. Concho Resources – carrying a Zacks Rank #3 (Hold) – is now counted as one of the top energy producers in the Permian basin with an enviable acreage of low-risk top-tier assets and a multiyear drilling inventory.
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
4. Diamondback Energy-Energen
The Permian deal frenzy continued to sweep the U.S. oil industry, bringing about a wave of consolidation in the prolific shale play. Another energy company to join the bandwagon was Diamondback Energy, Inc. (FANG - Free Report) , which, in August, announced the acquisition of Energen Corporation in a mega $9.2-billion deal, in a bid to bolster its Permian presence.
The purchase of Energen – concluded in November – transformed Diamondback into one of the leading Permian Basin oil producers. Adding around 25,493 net leasehold acres to Diamondback’s portfolio, the transaction made Diamondback the third-largest Permian explorer.
5. Encana-Newfield Exploration
In November, Canadian energy explorer Encana Corporation (ECA - Free Report) agreed to acquire TX-based Newfield Exploration Company (NFX - Free Report) through a transaction valued at $5.5 billion. The deal is expected to complete in first-quarter 2019, following which, the company plans to increase dividend payment by 25% and increase its share repurchase program to $1.5 billion. Total third-quarter production of the combined entity was 577,000 BOE/d, 52% of which was liquids.
The purchase of Newfield Exploration should transform Encana into one of the leading unconventional energy producers. Post-acquisition, the company's pro forma production is expected to increase roughly 20% from 2018 levels, while generating significant synergies for shareholders.
Are More M&A in the Oil Patch Coming?
As low oil prices continue to plague energy industry, the M&A market is likely to remain busy. The flurry of such activities in recent times suggest that stronger companies are lining up to buy the weaker ones.
A prolonged period of low oil prices will eventually lead to ‘survival of the fittest.’ Larger companies – especially those with cash to spend – are set to take advantage of this opportunity and buy quality assets at cheap valuations. The most vulnerable companies are the ones with increasing levels of debt and distresses assets.
Therefore, with oil still below the psychological $50-a-barrel threshold, energy investors should brace themselves for more M&A activities to unfold in 2019.
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