APA Corp.’s $2.6 billion purchase of Callon Petroleum Co. extends the industry’s strategy of lining up drilling sites without piling on debt.
Permian Basin oil and natural gas output may grow in 2024, though at a slower pace than last year.
The new year in the shale patch kicked off much as the old one ended, with a hefty all-stock takeover.
This time it was APA Corp. agreeing to buy Houston-based Callon Petroleum Co. for $2.6 billion. The deal hit a familiar note, with APA, formerly known as Apache, paying with shares instead of cash.
It’s part of a trend established since the pandemic. Before Covid-19, which crashed energy markets and tipped some US oil companies into bankruptcy, firms borrowed heavily to gobble up rivals and crank up production no matter the cost.
It also offers insight into the sector’s path ahead.
Buying with stock instead of cash means shale companies can line up future drilling sites without going deeply into debt, putting them on stronger financial footing to absorb price swings and stand up to OPEC.
The consolidation has the added benefit of giving them cheaper access to capital, better bargaining power with service companies and the ability to cut costs by merging operations.
One major deal bucked the trend: Occidental Petroleum Corp.’s $10.8 billion agreement to buy CrownRock LP. Oxy said it would pay a combination of stock and cash, and the company took out a $4.7 billion term loan from Bank of America to help fund it.
Incidentally, Oxy’s debt-fueled $55 billion Anadarko takeover in 2019 left it uncomfortably exposed when the Organization of the Petroleum Exporting Countries flooded the market soon after and sent prices crashing.
Analysts expect more deals to come.
A short list of potential targets with enviable drilling sites in the Permian Basin of West Texas and New Mexico includes Matador Resources Co., Permian Resources Corp. and SM Energy Co., said Andrew Dittmar of the research firm Enverus.
There’s another side of the story when it comes to M&A and the shale-OPEC balance of power. Consolidation shrinks the vast pool of shale producers, making it easier for the cartel to monitor what’s happening in the US.
“If OPEC is trying to manage the market with their production cuts, the fewer people growing production the better,” said Dan Pickering, founder and chief investment officer at Pickering Energy Partners LP.
The players left standing, however, may be more formidable.
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