ir Winston Churchill once admonished leaders to never let a good crisis go to waste, and Big Oil has rarely failed to heed the advice. Under normal circumstances, energy downturns have created perfect opportunities for deep-pocketed oil and gas heavyweights to land prime assets on the cheap. A good case in point: the last oil bust of 2016 was followed by a sizable number of huge M&A deals in the sector including the $60B tie-up between Royal Dutch Shell (NYSE:RDS.A) and BG Group, Canadian Oil Sands and Suncor EnergyEnergy, as well as a handful that fell through including the proposed merger between Halliburton (NYSE:HAL) and Baker Hughes (NYSE:BKR).
But Big Oil has now ditched that old playbook and appears largely disinterested in some M&A action this time around.
The current year is shaping up as one of the slowest in the oil and gas industry as far as mergers are concerned. According to data compiled by Bloomberg, so far there's been $86 billion of takeovers announced, pending or completed in the current year, on track for one of the most lackluster years for energy tie-ups in two decades.
Source: Bloomberg
M&A disaster
Oil executives appear too gun-shy to pull the trigger on the numerous distressed assets that have become available after the latest oil downturn--and for a good reason.
After all, the last M&A wave turned into a disaster for many of the acquiring companies.
Last year, Royal Dutch Shell cut its dividend from US$0.16 per ordinary share to US$0.4, good for a 66% cut. That marked the first time the company cut the dividend since WWII, a testament of just how severe the oil massacre has been, which is what Shell blamed in its press release. However, there could be another culprit to blame for the dramatic cut: the company's 2016 acquisition of BG Group, which set it back $60B.
Occidental Petroleum's (NYSE:OXY) $55B leveraged purchase of Anadarko has become the poster-child of oil and gas mergers gone bad. The deal has turned into a complete disaster, leaving the company in deep distress over its mountain of debt and water cooler wisecracks of how it could itself get acquired at a fraction of what it paid for Anadarko.
Big Oil's high debt levels are also to blame; Cowen has pointed at BP Plc. 's (NYSE:BP) extremely high debt, though it might have less to do with its 2018 merger with BHP Billiton for $10.5B and more to do with its Deepwater Horizon oil spill which has cost it a staggering $65B in clean-up costs and legal fees over the years.
BP's debt-to-equity ratio of 0.87 is way higher than the oil and gas sector's average of 0.47, and the highest among the oil supermajors.
BP is hardly alone in the debt conundrum.
Whereas Chevron (NYSE:CVX), Shell (NYSE:RDS.A), and TotalEnergies (NYSE:TTE) all have all announced a return to stock buybacks during the current earnings season, ExxonMobil (NYSE:XOM) has opted to pay down debt rather than reward shareholders. Exxon suspended buybacks in 2016 as it went on one of the most aggressive shale expansions, particularly in the Permian.
WSJ Heard On The Street's Jinjoo Lee says Exxon has less flexibility than its peers thanks to years of overspending followed by a brutal 2020. This has left the company in a vulnerable position, and now Exxon has little choice but to lower its debt levels which have recently hit record highs.
Luckily for XOM shareholders, CEO Darren Woods has reassured investors that reinstating buybacks is "on the table," though he has reiterated that "restoring the strength of our balance sheet, returning debt to levels consistent with a strong double-A rating" remains the top priority.
Source: Y-Charts
Cowen, though, says that oil majors like Chevron and Total with relatively strong balance sheets could go for cheap assets such as GALP Energia (GALP.Portugal) or BP's stake in a gas project in Oman.
Capital discipline
Instead of mergers, oil and gas companies are preferring to maintain the all-important dividend or cut capex in a bid to preserve liquidity. This is a trend we clearly witnessed during the last earnings season.
The world's oil and gas companies have continued to hold back from raising their capital spending budgets as they try to maintain capital discipline.
According to RBC, the aggregate investment budget for the 190 oil and gas companies tracked by the firm is forecast to grow by 4% to $348B from $334.7B in 2020, but a good 25% below 2019 levels of $461.7B spent.
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Top spenders Saudi Aramco (ARMCO) and PetroChina (NYSE:PTR) are expected to spend a combined $170.3B this year, up 12% from 2020 levels but 3.4% below 2019 levels.
Combined spending by the seven global oil supermajors is expected to total $78.2B in 2021, just 1% more than the $77.8B spent in 2020 and 20% lower than $110B spent in 2019.
Not everybody shares Cowen's bearish M&A outlook, though.
Goldman Sachs analyst Michele DellaVigna says the highly fragmented U.S. shale industry could still be a candidate for a spate of consolidations.
DellaVigna has conceded that we are not likely to see a repeat of the mega-mergers of the 1990s; however, he says there's a financial case to be made for mergers, especially in a sector like U.S. shale that has previously lacked cost discipline:
"The oil industry has delivered its best corporate returns in periods of consolidation, financial tightening and rising barriers to entry. We believe this environment (and shareholder pressure for de-carbonisation) could engender a similar phase of consolidation and capital discipline, as in the late '90s."
By Alex Kimani for Oilprice.com
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