ESG, consolidation impacting the upstream acquisition market


Upstream acquisitions were among many aspects of the energy industry affected by the COVID-19 pandemic.

Last year was an anomaly, said Jake Plunk, CEO of Fleur de Lis Energy.

“We were at $ 40 billion to $ 50 billion in annual transactions,” he said of the upstream acquisition market. In 2020, he said, it stood at nearly $ 9 billion.

“There had been a lot of market paralysis, whether it was the availability of capital or that many companies had so much debt that they could not pay the price without going bankrupt,” he said. continued by participating in the monthly Oilfield Strong webinar presented by OTA Environmental Services. “Buyers and sellers couldn’t come to the table. “


This year, he said, the acquisition market has rebounded, highlighting the acquisition by Pioneer Natural Resources of Parsley Energy at the end of last year and of DoublePoint Energy, as well as two acquisitions made at the end of last year. last year by Diamondback Energy, not to mention the purchase of ConocoPhillips. from Concho Resources.

Plunk hypothesized that ESG pressures – environment, social and governance – prompted Shell to sell its Delaware Basin stakes to ConocoPhillips while Occidental sells to repay debt resulting from the purchase of Anadarko. Petroleum. What he called the cleanup of the portfolio – the removal of non-core assets – is a third reason the acquisitions market has rebounded this year.

The portfolio adjustments are what opened the door for Continental Resources to enter the Permian, buying the assets of Pioneer in Delaware, he said. Pioneer acquired these assets through the purchase of Parsley, which acquired them through the purchase of Jagged Peak Energy.

“I think Pioneer is happy with the outcome, moving this asset to another large public company capable of financing the development,” Plunk said. “It’s a good entry point for Continental to enter the Delaware Basin.”

Turning to private equity, he said some private equity firms would have sold their stakes two or three years ago in a healthy buy-and-sell market. But in 2019, “we had $ 22 billion in transactions. The industry was already becoming capital-constrained and deals were more difficult to make. Then, in 2020, we entered the pandemic and pushed things over a cliff. It took 18 months to two years to rectify these problems.

There is still a huge amount of capital to be spent to effectively develop these assets, Plunk said, “and we are now in a world where if you don’t have a rock-solid balance sheet and the cash flow to develop these assets. active over the next five to 25 years, you will likely need to find a partner, which is why a lot of these transactions have been in the past 12 to 18 months.

The general theme across all production areas, and whether private or public companies, is consolidation, Plunk said and it is a theme he hopes to continue.

There is always a well-funded private equity market, he said, but private equity executives are much more cautious about how they deploy that capital, whether through drilling on markets. existing leases or through acquisitions. Investors’ distaste for energy makes it more difficult to open new funds, he said. There is funding for alternative energies, for water development or for infrastructure assets, but for upstream “it’s definitely a new dynamic as to how to capitalize these assets”.

ESG isn’t going to go away, he said, but he’s putting the three in different buckets. On the environmental front, he called for honest measurement of emissions and flaring. But more importantly, he wants an honest and open dialogue between those who promote new industrial regulations or who advocate for zero emissions or zero carbon by 2030.

“If we could have an honest discussion with these people, I would tell them that these issues can be resolved. But there has to be an open dialogue that this is what can be done and this is what it will cost and your electricity bill will be higher, what you spend at the gas pump will be higher. and it’s just a fact, ”Plunk said.

He also feels that those who work in the industry are unfairly portrayed.

“Where is the greatest oil production in the United States? Mainly in West Texas where oil and gas is the biggest employer and a big provider of good jobs and stuff in those little communities – Casper, Wyoming; Gillette, Wyoming; Andrews, Texas; in Oklahoma. What gets lost is what the industry provides is the “S” of ESG that gets lost in oil and gas in my opinion. “

With over 20 years of experience in the industry, Plunk concluded, “I absolutely love this company. I love this company. I’m optimistic that over time a lot of these things will work out. Oil and gas are not going to go away; absolutely not.

He justified this opinion by adding that he would not be boarding a battery-powered plane anytime soon. He explained that in May he was returning from New Mexico. “There had been a cold front movement through northern New Mexico and the Panhandle and there were four Teslas on the side of the road with their blinders on. It was cold so they had to run their radiators and wipers and that drained their batteries. They thought they could get from Amarillo to Childress to a charging station and they couldn’t.

There may be a planned obsolescence in cellphones leading consumers to buy new phones every two years, but he doesn’t see people willing to spend $ 70,000 on a new electric vehicle every two years due to the short battery life.

“This industry is not going to go away. We need to do a better job as an industry to educate the public that this is going to happen and what we are doing to reduce emissions and be better stewards of the environment, ”he said.

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