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  • Roger S. Conrad

Upstream Takeover Targets

By Elliott H. Gue on Oct. 20, 2016

This paucity of deals targeting publicly traded exploration and production companies doesn’t necessarily come as a surprise: Activity on this front has been lean in recent years.

(Click table to enlarge.)
US EP 063016

The three acquisitions involving upstream master limited partnerships (MLP) fall into the category of distressed deals, with BreitBurn Energy Partners LP filing for bankruptcy protection and Vanguard Natural Resources LLC (NSDQ: VNR) recently delaying an interest payment.

Noble Energy’s (NYSE: NBL) all-stock acquisition of Rosetta Resources diversified the company’s asset base, providing the firm with a new growth platform in the Eagle Ford Shale and the Permian Basin. The same goes for Encana Corp’s (TSX: ECA, NYSE: ECA) cash purchase of Athlon Energy, a pure play on the Permian Basin.

On the other hand, Whiting Petroleum’s (NYSE: WLL) acquisition of Kodiak Oil & Gas complemented the buyer’s existing asset base in the Bakken Shale.

With shares of US exploration and production companies trading at elevated valuations, the prospect of an all-stock acquisition may not appeal to buyers or sellers. At the same time, upstream operators continue to take advantage of this currency to acquire assets and privately held companies.

We expect these transactions to predominate as long as upstream operators seek to monetize their noncore acreage and private-equity operators look to cash out of energy investments.

(Click table to enlarge.)

A quick glance at the list of larger asset acquisitions announced by publicly traded exploration and production companies in the US reveals that upstream operators continue to focus on establishing or adding to their positions in two areas: the Permian Basin, especially the northern Delaware Basin, and the STACK play in Oklahoma’s Anadarko Basin.

This trend reflects our call that The Next Phase in the Shale Oil and Gas Revolution will involve exploration and production outfits with the strongest balance sheets and positions in the lowest-cost plays to take market share from their peers.

Many of the transactions in our table involve existing players such as Diamondback Energy (NYSE: FANG), Parsley Energy (NYSE: PE), Concho Resources (NYSE: CXO) and Pioneer Natural Resources (NYSE: PXD) expanding and blocking up their acreage in the Permian Basin. Accumulating uninterrupted swathes of land enables upstream operators to drill wells with extended laterals that offer superior returns and initial production rates.

However, the trend of latecomers using acquisitions to diversify their portfolios and establish a growth platform in the Permian Basin and STACK plays has also continued.

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    • Elliott H. Gue

      Founder and Chief Analyst: Capitalist Times and Energy & Income Advisor

    • Roger S. Conrad

      Founder and Chief Analyst: Capitalist Times and Energy & Income Advisor