M&A Wave Poses New Challenges for Gassy US E&Ps

Copyright © 2024 Energy Intelligence Group Published: Fri, May 31, 2024 Author Mark Davidson,

US gas-producing assets continue to consolidate under a shrinking number of operators, raising questions about the role of smaller independents and the impact on the broader gas market.

This week, ConocoPhillips announced plans to buy Marathon Oil for $22 billion, while Hess shareholders approved Chevron’s previously agreed $60 billion acquisition of the company (although arbitration may yet derail that deal). The four firms produce a combined 4.4 billion cubic feet per day of gas in the US, roughly 4% of the Lower 48 total.

The moves follow Exxon Mobil's successful completion earlier this month of its $64.5 billion purchase of Pioneer Natural Resources, which created the US' largest oil and gas producer and put their combined 3.25 Bcf/d of domestic gas output under a single umbrella.

To be sure, these deals were made with oil in mind — and not just US oil, as in the case with Chevron-Hess. But the ongoing consolidation among these and other oil-weighted heavyweights has the knock-on effect of bringing substantial volumes of associated US gas under the wings of fewer players.

The impact is compounded by parallel consolidation happening among gas-focused independents, topped by Chesapeake Energy’s proposed $11 billion acquisition of Southwestern Energy to create the US' largest gas producer, at 7 Bcf/d.

For gas-focused US E&Ps with smaller but still substantial holdings, this trend — which analysts expect to continue — will force management to get more creative. That could look like CNX Resources' planned move into the hydrogen space or EQT's extension into the midstream sector with its planned acquisition of Equitrans Midstream, which owns Mountain Valley Pipeline.

“Larger operators benefit from economies of scale, better and cheaper access to capital and better buying power,” David Carter, senior industry analyst for Houston-based energy consultancy RSM US, told Energy Intelligence. “However, small to midsize operators can leverage better agility, leaner operations, specialization and willingness to take risks with new technologies or underexplored areas.”

Gas producers in the Appalachian Basin “may be watching to see where they can grow their inventory with complementary assets,” Carter said. “Similarly, they may also reevaluate their own holdings to identify noncore assets that may be more valuable to other companies.”

More Gas, More Influence

Wood Mackenzie analyst Ryan Duman agreed that scaling up operations through M&A allows companies to become more efficient in the field, allowing them to produce more gas at a lower cost than their smaller peers.

But the advantage also extends to the highly competitive playing field of contracting with pipelines, end-users and particularly LNG exporters that are likely to be a major source of demand growth in the coming decade.

“More gas on the market means more influence,” Duman told Energy Intelligence. “So if you are a midsized independent without the scale of, say, Chevron, you may have less ability to have a seat at the table with LNG developers.”

These factors will likely affect how gas producers such as Antero Resources, Range Resources and CNX — large independents whose market share is nonetheless shrinking amid the ongoing consolidation — consider merging.

“I think we are going to have to see some consolidation in that space,” Wood Mackenzie analyst Alex Beeker told Energy Intelligence. He suggested that a Range-Antero combination could make sense, as it would create a 4 Bcf/d powerhouse in Appalachia.

That said, Beeker noted that the extended period of weak gas prices has most such independents in debt-reduction and cost-containment mode, which may impede their willingness to take on such dealmaking anytime soon.

Bearish Impact?

In fact, US gas' recovery from its persistent bear market could be slowed by the ongoing consolidation in the gas patch, especially since it’s occurring mostly in the already glutted Permian Basin and Haynesville Shale.

“These larger companies are going to be best positioned to grow their production going forward,” Duman said. “Here you have all of this extremely low-cost gas hitting the market, and the fact that it is coming from fewer and more efficient companies is really not an encouraging sign for the market.”

Wood Mackenzie estimates that associated gas from the Permian will grow by 11 Bcf/d by 2035, while Haynesville output will increase by 8.5 Bcf/d, which could keep the market oversupplied even as demand surges from LNG terminals, data centers and power generators, according to Duman.

The consultancy is bullish on gas prices in the long run as it proves itself much cleaner than oil and coal, but “the reality is the industry’s own success could temper just how strong that recovery is.”