Choppy oil and equity markets rock the M&A boat

Upstream deal activity dried up last week as the market grappled with a decline in crude prices, briefly taking WTI below $60/bbl and publicly traded E&Ps taking a hit on equity values. Over the last month, the XOP has declined about 12%—underperforming the S&P 500—with multiple oil-weighted E&Ps seeing losses of 20% of more. While one week is insufficient to establish a definite trend, it seems likely M&A activity will be challenged in the upcoming quarter by both lower commodity prices and increased volatility widening the bid/ask spread between buyers and sellers.

Looking back to the start of 2014 in quarters where the average WTI price was 5% or more below the prior quarter, the median decline in deal value was 33%. Public companies are likely to focus their near-term attention on navigating the crude price downturn as well as protecting the balance sheet and fixed dividends without much appetite to add leverage financing acquisitions. They are relatively well positioned to withstand a downturn in crude prices through 2025, however, including the benefit of hedges, making it also improbable they will turn to non-core asset sales at a time when prices are likely to be depressed. For private equity portfolio companies, the current market will likely be viewed as less favorable for exits with potential sellers looking for price recovery and stability before taking their assets to market.

Asset repricing in a lower crude price environment is a key component of the expected activity downturn and one with significant uncertainty depending on the length of the selloff’s depth. An immediate outcome would be assets’ current production having less value at a lower price deck. Oil-weighted 2014 production sold for an average of $100,000/boe/d and fell to about $40,000/boe/d in 2015. From 2019 to 2020, production value declined from $26,000/boe/d to $18,000/boe/d. Oil-weighted production averaged $40,000/boe/d in 2024 and is likely to come down to the low $30,000/boe/d range.

The outlook for undeveloped asset prices is a bit murkier and likely less dependent on immediate shifts in crude prices. The industry downturn in 2020 initiated a resetting of acreage value in the key Permian Basin with land consistently averaging $20,000-$30,000/acre from 2016 to 2019 falling to an average of $10,000/acre. This initiated a frenzy of consolidation that saw prices climb back to and surpass the prior highs. Such a dramatic move is less likely this time, given companies’ acute awareness of inventory scarcity, better understanding of resource and less room for a pullback in activity given growth profiles from public companies are already muted.

At the same time, even underwriting inventory at a consistent discount rate, including an average PV-20 for Permian locations, but a lower price deck would lead to a decline in values. Buyers will also likely be reluctant to pay for inventory with a breakeven above $50/bbl—as they had in the last year—given low returns on these locations in a $60/bbl WTI world. Answering these questions around asset valuations and getting a better understanding of how long the dip in crude prices will last will be key for restarting M&A activity.