By - Jim Vess

Weak oil and gas markets forcing mergers and bankruptcies among shale operators

Energize Weekly, November 4, 2020

After weak third quarter in 2020 for oil and gas industry mergers and acquisition, one of the worst in 10 years, the fourth quarter opened with a string of big deals – a sign that the sector remains under pressure to consolidate, according to analysts.

“There is a broad consensus that consolidation is a net positive for the industry,” Andrew Dittmar, a senior analyst with Enverus, an industry analytics firm, said in a statement. “Including the corporate deals from 2019, that process looks to be well underway.”

The sector has been under the twin pressures of low commodity prices and weak demand, a product of an economy hobbled by the global, novel coronavirus pandemic. Many operators were already in a precarious financial position in terms of debt and cash flow.

Exploration and production (E&P) and oil field service companies are carrying a record $89 billion in debt in 2020 and 84 companies have already gone into bankruptcy this year, according to Oslo-based industry consultant Rystad Energy.

Despite these pressures, merger and acquisition activity in the third quarter flagged, posting just 28 deals with a value of $21 billion – with 62 percent of that coming in one big deal, the Chevron Corp. purchase of Noble Energy for $13 billion, according to Enverus.

The figures for the quarter were also bolstered by an end-of-quarter deal in which Devon Energy acquired WPX Energy for $5.6 billion on Sept. 28.

The Devon’s WPX purchase set the stage for a string of deals in October as Conoco Phillips agreed to pay $9.7 billion for Concho Resources, Pioneer Natural Resources anted up $4.5 billion for Parsley Energy and Cenovus Energy bought Husky Energy for $18 billion including debt. All three were all-stock deals.

“A tie-up of Pioneer and Parsley has been something at least in the background of potential shale company combinations given their tight asset fit in the Midland Basin,” Dittmar said. “However, it took an industry slowdown that sparked a wave of consolidation to finally bring these two together. This is part of a historic winnowing of U.S.-based independent E&P companies.”

Similarly, the Concho purchase “strategically fills a gap” in the Conoco portfolio by adding 55,000 net acres in the Permian Basin, Dittmar said. Conoco already has holdings in shale plays such as the Eagle Ford and Bakken.

The Cenovus-Husky merger will create Canada’s third largest oil producer and produce $914 million in cost savings, according to the companies.

All the acquisitions, regardless of the play have focused on companies with reasonable debt loads. “Companies with impaired balance sheets are being left to find their own way, resulting in a spate of Chapter 11 filings,” Dittmar said.

Rystad Energy projects that under current prices for oil and natural gas there will be dozens of additional bankruptcies with the accumulated debt reaching $100 billion, though bankruptcies will not reach the 2016 record of 142 E&P filings.

“While oil and gas market fundamentals have improved significantly now compared with April-May, we argue that the North American bankruptcy wave is not over yet,” Artem Abramov, head of shale research at Rystad Energy, said in a statement.

“A significant number of small- and mid-size public and private producers are still experiencing financial challenges in the current price environment and questions about their ability to service their debt in 2021-2022 remain,” Abramov said.

There have been $30 billion in announced E&P mergers in the U.S. in 2020.

In the past decade, the top three acquisitions were Occidental Petroleum’s purchase of Anadarko Petroleum for $57 billion; Freeport-McMoRan’s $16.3 billion deal for E&P Plains, and BHP Billiton’s $15.1 purchase of Petrohawk Energy. The Conoco and Chevron deals ranking fourth and fifth respectively, according to Enverus.

“Even the total dollar amount transacted significantly understates the scale of consolidation going on in the industry given still depressed equity prices relative to past years,” Dittmar said. “This is a historic turning point in the development of U.S. unconventional resources.”

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