By: David Blackmon – Forbes – Drilling? Consolidation? What Drilling? What consolidation? – The highlights of the quarterly mergers and acquisitions tracking report from Enverus are out today, and they show that the predicted consolidation within the U.S. shale business is still failing to materialize. This is not really a surprising result given all of the volatility in the market seen during the second quarter of the year thanks to the COVID-19 pandemic and the effort to flood the market during March and early April by Saudi Arabia and Russia.
Here are some of the highlights contained in the report, as provided to me in an email from an Enverus representative:
- Natural gas-focused deals dominated the 2nd quarter M&A landscape.
- $2.6 billion in Q2 upstream deals represents roughly a 200% increase over lows seen during the first quarter of this year. But the second quarter activity still ranks as the third lowest quarterly value since 2009.
- The largest deal seen during Q2 was the $845 million combination of a pair of Permian Basin producers, Pure Acquisition Corporation and HighPeak Energy.
- Of the five largest deals, the other four were gas-related.
- The largest of those gas-focused deals was Shell’s $541 million sale of its upstream and midstream business in Appalachia to National Fuel Gas.
- The next largest deal consisted of the sale of an overriding royalty interest by Appalachian producer Antero Resources to private investor Sixth Street Partners for $402 million.
Overall, gas increased its share of M&A from 5% in 2019 to 30% year-to-date.
Again, none of this should come as a surprise to any industry observer. Companies with healthier balance sheets are keeping their powder dry due to all of the volatility in the market, plus the anticipation that this week’s Chapter 11 filing by Chesapeake Energy represents the first hole in what might soon become a dam break of bankruptcies in the upstream segment of the business. One can’t help having the feeling that the Q3 and Q4 M&A trackers from Enverus will show more robust activity.
The Rig and Frac Spread Counts Continue to Crater
A new trend seems to be developing around the U.S. count of active drilling rigs. As companies begin to execute on their revised, lower capital budgets for the second half of 2020, the downward spiral in the rig count appears to be accelerating.
The Enverus daily rig count on June 30 dropped to just 272 active rigs, a fall of 8% week-over-week, and 13% lower than a month before. Meanwhile, the count of active frac spreads by Primary Vision stood at just 70 nationally as of Friday. That’s down from 78 the week before, although it is substantially higher than the low of 45 recorded on May 15.
Thus, while operators continue to re-activate wells they had shut-in during the depths of the March/April price bust, shale producers are most certainly not drilling the number of wells that would be required to offset production losses due to the rapid initial decline rates seen in shale wells. It is likely that most of the additional frac crews added since mid-May are focused on efforts by shale drillers to work off their inventories DUC (drilled but uncompleted) wells rather than the drilling of new wells.
While there could be some non-obligational drilling taking place in the sweetest spots of the Permian Basin at this point, in shale plays like the Eagle Ford, where break-even prices are higher and fewer than 15 active rigs were working last week, it is likely that pretty much every well being drilled is being done in order to satisfy lease obligations.
Drilling obligations in order to hold leases are pretty much the only drilling activity most upstream companies can justify at the moment. With the 2nd half budgets for the larger, corporate operators now set in place, we should expect drilling and fracking activities to remain low for the rest of 2020. The natural well-decline rates in these shale plays will ensure that the U.S., which has already seen a loss of at least 2 million barrels of oil per day in overall production, will lose millions more before the year is over.