This year is proving active for energy investment bankers and lawyers as they shepherd industry merger and acquisition (M&A) deals from conception to completion.
According to research firm Enverus, the oil and gas industry negotiated $192 billion worth of transactions last year, a record. The record amount included ExxonMobil’s $60 billion purchase of Pioneer Natural Resources and Chevron’s $53 billion acquisition of Hess.
The first quarter of 2024 saw $51 billion in new energy deals announced, up dramatically from the $8.6 billion in last year’s first quarter. The $26 billion purchase of Endeavor Energy Resources by Diamondback Energy drove the first quarter total. Last month, ConocoPhillips agreed to buy Marathon Oil for $17.1 billion. More recently, private equity shale oil company Ameredev II sold its Permian Basin acreage to Matador Energy for $2 billion.
Unsurprisingly, M&A activity is expanding to the oilfield service industry with last week’s agreement for Noble Corp. to acquire Diamond Offshore Drilling. This offshore drilling consolidation is not a surprise, as service industry consolidation has often followed that of its customers. Getting bigger and financially stronger enables service companies to counter the greater contract bargaining power of exploration and production (E&P) companies.
While many oil and gas industry deals involved onshore shale producers, the overall health of the E&P industry is leading to growing across-the-board capital investment. The offshore market is a beneficiary of the E&P spending increase. It boosts demand for the limited supply of active offshore drilling rigs. That means higher day rates and longer contract terms as oil companies fear the inability to execute long-term exploration and development plans if rigs are unavailable on the desired timetable.
Noble’s acquisition of the 12 semisubmersibles and drillships of Diamond Offshore will push the company from seventh to third place among the top 10 offshore drilling companies. The combined 43-rig fleet company surpasses Transocean, number three ranked, with its 39 rigs. While bragging rights are fun, they don’t get in the way of improving business operations and investment returns, especially in this financial discipline era for the energy industry.
According to the presentation by Noble officials discussing the terms of the $1.6 billion cash and stock purchase of Diamond Offshore, the transaction will be “significantly and immediately accretive to Noble’s free cash flow per share.” The company expects to realize $100 million in cost savings, with 75% recognized in the first year. Noble also announced it would boost its current quarterly dividend of $0.40 a share to $0.50 and will continue the higher rate. This 25% dividend increase demonstrates the positive financial impact of the acquisition.
With forecasts for growing E&P spending, the outlook is for further offshore drilling market improvement. It means the likely outcome is more competition for rigs with higher day rates. There is room within the offshore drilling industry for more combinations, just as E&P sector consolidation is expected to continue.
