There has been a flurry of mega deals in the US shale patch aimed at delivering significant productivity gains and offsetting impacts of any potential drilling slowdown. The Permian Basin in particular has been at the epicenter of M&A frenzy in recent years, and this trend shows no signs of abating. Both upstream and midstream companies operating within the basin are actively pursuing strategic consolidations to bolster their financial positions, achieve operational scale, and expand their strategic footprint. There are several trends and factors that suggest that we have not seen the end of mega consolidation in upstream and midstream sectors.

Producers Lead the Charge

The initial wave of M&A was spearheaded by producers seeking to consolidate their operations and enhance drilling efficiency. Notable transactions include Pioneer’s acquisitions of Parsley Energy and DoublePoint Energy, ConocoPhillips’ acquisition of Concho Resources, Chevron’s purchase of Noble Energy, Apache’s acquisition of Callon Petroleum, Exxon/Mobil’s purchase of Pioneer and the recent acquisition of Marathon Oil by ConocoPhillips. That does not even cover all the producer M&A’s, so you see the trend. These moves are part of a broader strategy among producers to strengthen their positions across multiple basins and optimize resource extraction capabilities. Ownership of top shale basins, such as the Permian, is increasingly falling into the hands of fewer but larger operators, with the necessary resources to chase technological breakthroughs and drive economies of scale that could support further output growth.

Midstream Operators Follow Suit

In tandem with producers, midstream companies have also engaged in significant mergers and acquisitions to optimize synergies and streamline operations. Key transactions include the merger of EagleClaw and Altus to form Kinetik, Kinetik’s acquisition of Durango Midstream, and Enterprise’s acquisition of Navitas. Other recent notable acquisitions include P66’s purchase of DCP Midstream and Pinnacle Midstream, Targa’s acquisition of Lucid Energy, and Energy Transfer’s acquisitions of Crestwood and WTG Midstream.

The surge in midstream M&A can be attributed to several factors. Firstly, slowing production growth due to capital discipline by E&P Companies have made organic growth more challenging. Growing for the sake of growth is not an option anymore for E&P companies in the new operating paradigm. Consequently, midstream companies have aggressively pursued M&A to show investors continued growth in EBITDA [earnings before interest, taxes, depreciation, and amortization]. Secondly, ever increasing regulatory scrutiny and increasing difficulties in obtaining permits to build large capital projects such as pipelines and terminals, have slowed the investment that underpins midstream EBITDA growth.

The M&A route, therefore, is becoming much more appealing to midstream operators as a way to provide growth sans regulatory uncertainty, as traditional organic growth prospects slow. These acquisitions not only provide immediate revenue streams but also enhance operational efficiencies by integrating assets that span the entire value chain from production to market. Scale is crucial as it allows companies to optimize their operations and provide integrated services across multiple locations, thereby increasing competitiveness. The trends are clear – acquire to gain scale, expand quickly and mitigate regulatory risks associated with new capital projects.

Case Study: Energy Transfer’s Strategic Acquisition

Energy Transfer’s acquisition of WTG Midstream, set to close in Q3 2024, exemplifies these M&A trends. WTG Midstream boasts significant assets in the Midland Basin of the Permian, complementing Energy Transfer’s existing dominance in the Delaware Basin. This acquisition includes:

•    6,000 miles of gathering pipelines in the Midland Basin.

•    Eight processing plants with a total capacity of 1.3 billion cubic feet per day (Bcf/d), with two additional plants under construction adding 0.4 Bcf/d capacity.

•    Access to high-quality customers with long-term contracts averaging more than eight years.

Initially included in this deal was a 20% stake in the BANGL pipeline, which transports NGLs from the Permian to Corpus Christi and Sweeny, enhancing vertical integration. However, due to a right of first offer from another stakeholder, this aspect of the transaction will not proceed. Nonetheless, the acquisition of Midland assets strategically positions Energy Transfer to capitalize on existing operational capabilities without the regulatory, permitting, or construction risks associated with greenfield projects to keep their downstream NGL/gas pipelines, fractionation, storage and export docks full and support potential expansions to accommodate these incremental volumes.

Conclusion

Looking ahead, we anticipate continued M&A activity in the Permian Basin. Larger midstream companies with robust access to capital are expected to lead further consolidation efforts. Simultaneously, private equity firms are likely to seek exits from well-positioned investments, contributing to ongoing market dynamics. The surge in M&A within the Permian Basin reflects strategic responses to current market challenges and opportunities. By consolidating resources and optimizing operational synergies, companies are positioning themselves for sustained growth and resilience in a dynamic energy landscape.

-Sue Neville

If you are interested in U.S. Midstream M&A outlook and obtaining a detailed analysis of midstream sector in each of the key basins, please contact us at info@enkonenergy.com. We encourage you to subscribe to our articles to get weekly articles via email.

Enkon Energy Advisors is a boutique consulting firm specializing in oil & gas, and energy transition since 2012. We bring deep expertise in a range of markets including natural gas, NGLs, Oil, LNG, and Energy Transition where we provide commercial and market advisory to investors, energy companies, and project developers with consulting services, subscription reports, and analytics, with the goal of delivering commercially actionable outcomes to our client.