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Crude awakening for an anticipated O&G M&A renaissance

The doubling of crude oil prices between early November 2020 and mid-July 2021 initially had dealmakers considering less profitable North American oil patches. In 2020, no-one wanted to touch assets outside of the Permian Basin, the home of low-cost production in west Texas and northern New Mexico.

But that had begun to change. Bonanza Creek Energy this year acquired Extraction Oil & Gas and Crestone Peak Resources, consolidating the largest pure play upstream energy companies in Colorado's Denver-Julesburg Basin. This could be a sign of more to come.

Debt extraction

Bonanza's recent Extraction play was underpinned by the latter's Chapter 11 bankruptcy filing—taking debt off the company's books made the acquisition viable. Other companies emerging from bankruptcy could also soon be targeted, including Whiting Petroleum, Chesapeake Energy and Sable Permian.

The surge in oil prices over the past nine months certainly hasn't hurt. In the low-cost Permian, producers can break even below US$20 a barrel. Elsewhere, the price of crude needs to be upwards of US$40. Some saw US$60 as the mark above which buffeted producers would return to the dealmaking fray.

Between November 1, 2020, and July 13, 2021, the price per barrel of West Texas Intermediate surged from approximately US$35 to US$75, a level that would likely support a confident revival in M&A.

Unfortunately for hopeful dealmakers, markets have not been playing ball since then.

Window of missed opportunity?

COVID-19 infection rates are on the rise again due to the Delta variant, spooking investors and sparking a precipitous decline in the price of crude since July 13, as sentiment on the economic recovery has soured. At the time of writing, West Texas Intermediate (WTI) was trading at just above US$66.

What's more, OPEC+—the consortium of oil-producing countries—has since agreed to ramp up production by 400,000 barrels a day. The group will also reverse an existing cut of 5.8 million barrels per day by September next year to help support the global economic recovery. Ultimately, this will mean a weaker oil price and less incentive to transact. The Permian may well start looking pretty attractive again.