Location a key factor in share price reaction to upstream M&A

Upstream oil and gas acquisitions that involve a company buying in a new basin are more likely to generate a short-term negative shareholder reaction than deals in basins where companies have existing operations, according to a new report from Evaluate Energy. 

An analysis of the 153 corporate mergers valued at $50 million or more between January 1, 2014, and August 31, 2024 showed that buying assets in new basins resulted in mostly negative share price reactions the day after the deal was announced. 

The trend is most likely linked to valuation metrics and costs, according to Evaluate Energy Senior Oil and Gas Analyst Mark Young, in the report. 

“If you’re going into a new basin, integrating the acquired assets into your portfolio is probably going to take a little bit longer and you might need to rely more on the target company’s expertise,” said Young. 

“This might make the cost reductions that usually come with a bigger organization expanding in the same basin a little bit harder to realize.” 

Buying out of basin could also be seen as a sudden shift in strategy, which might be “jarring” to investors, he added.  

“You’re relying more on how the deal is being communicated by management to dictate how the markets reacts to it,” said Young. “Investors might be more skeptical of any benefits and think more along the lines of ‘I’ll believe it when I see it’ — and reward you then.” 

Young emphasized that negative reactions do not equate to a bad deal, just that the share price reaction signalled some degree of investor uncertainty in the immediate aftermath of the deals being announced.  

Going against the grain 

Some deals did not follow this trend.  

Evaluate Energy’s report highlights the example of Kosmos Energy’s $1.23 billion acquisition of Deep Gulf Energy from back in 2018. This represented a move into the Gulf of Mexico for a company that was previously focused on offshore Africa developments. 

Despite the acquisition being in a new region of operations for the company, Kosmos saw a 5% increase in its share price the day after the deal was announced.  

Two factors potentially explain this positive reaction, said Young. 

“The deal saw Kosmos acquire a large existing producer in a very well-developed area with established infrastructure, which can’t really be said for where Kosmos was operating before,” he said.  

“Equally, it’s a U.S. headquartered company with U.S. investors, suddenly now active in arguably the most famous U.S. producing area of them all.” 

During the deal announcement Kosmos said geologically speaking, its two asset portfolios were very similar. 

“The fundamental geologic and geophysical skills are the same,” said Kosmos Energy CEO Andy Inglis, when discussing the acquisition on the company’s Q2 2018 results call.  

“Our ability is to add the rigor and discipline of our regional knowledge and actually to leverage some of the relationships we have with the majors…with BP and with Chevron.” 

Evaluate Energy’s report examines this trend in more detail and also looks at how purchase price metrics, deal structure, oil price and debt concerns impacted shareholder reactions to North American upstream mergers over the past 10 years.  

Download the full Evaluate Energy report at this link.