We Go Together - Another Permian E&P Merger Aimed at Building Scale and Returning Cash

The pace of multibillion-dollar M&A activity among oil and gas producers may have slowed a bit from 2020 and 2021, but big deals are still happening. Just last week, publicly held Centennial Resources Development and privately held Colgate Energy Partners III announced plans for a $7 billion “merger of equals” that will combine two midsize E&Ps in the Permian’s Delaware Basin to form one of the area’s larger producers. Each of the companies brings similar and complementary production assets to the deal, as well as corporate leaders very much in sync about the significance of scale in today’s increasingly concentrated upstream sector — and the importance of returning a big chunk of free cash flow to investors. Speaking of investors, an extraordinary 12% stake in the combined Centennial and Colgate will be held by the pro forma company’s management — that’s about 12x the norm among its peers. In today’s RBN blog, we discuss the Centennial/Colgate merger and what’s driving the ongoing consolidation in the U.S.’s most prolific hydrocarbon play.

Over the past two years, a combination of factors not only ushered in an era of unprecedented financial discipline among E&Ps, but it also spurred a boom in upstream consolidation the likes of which we haven’t seen since the turn of the century. As we said in Buy Buy Buy, most of the major deals announced since COVID arrived in early 2020 have involved one big, publicly traded E&P buying another, typically via all-stock transactions — these include ConocoPhillips’s $13.3 billion acquisition of Concho Resources, Chevron’s $13 billion purchase of Noble Energy, Cabot Oil & Gas’s $9.3 billion buy of Cimarex Energy (the combined company is now known as Coterra Energy), and Pioneer Natural Resources’ $7.6 billion acquisition of Parsley Energy. There also were a number of public-buys-private deals, however, exemplified by Pioneer’s agreement to buy DoublePoint Energy for $6.4 billion, as well as many mergers and acquisitions involving smaller producers, which we focused on in Baby I’m-A Want You. A commonality among much of the M&A activity — large, medium or small — has been that it involves assets and acreage in the hottest production areas, namely, the Permian and (to a much lesser extent) the Haynesville and the Marcellus/Utica. For example, Earthstone Energy, a publicly held independent oil and gas producer, has announced five acquisitions totaling more than $1.8 billion since December 2020, all involving acreage and production in the Permian’s Midland Basin. In announcement after announcement, buyers and sellers alike said they were looking to add scale, improve efficiency and boost the cash they return to shareholders.

Which brings us to the focus of today’s blog: the recently announced plan by Centennial Resource Development to combined with Colgate Energy Partners III to create what they say will be the largest pure-play E&P in the Permian’s Delaware Basin. Privately held Colgate, formed in 2015, had been considering an IPO (initial public offering) since late last year but ultimately chose a less-risky path to going public that also will funnel $525 million in cash to the company’s sponsors.