The consolidation in the U.S. shale patch is picking up pace after the crash in oil prices earlier this year. The latest big transaction in the U.S. oil industry involved the largest independent oil and gas producer ConocoPhillips buying Permian-focused Concho Resources in an all-stock deal valued at US$9.7 billion. The transaction will create a giant shale player with combined oil production in the Permian to rival the likes of Chevron. The new ConocoPhillips will be the largest independent oil and gas company, with pro forma production of over 1.5 million barrels of oil equivalent per day, ConocoPhillips said on Monday.
Before this transaction, the shale patch had already seen two large corporate deals since oil prices crashed in March after oil demand plunged with the pandemic and after Saudi Arabia and Russia waged a brief but disastrous price war that flooded the market with oil when global demand was crashing by 20 percent. Those two deals were Chevron’s acquisition of Noble Energy and the Devon Energy-WPX Energy merger.
Analysts expect consolidation to continue. They saw those two deals as the beginning of a wave of mergers and acquisitions (M&A) in the U.S. oil industry, in which exploration and production companies with manageable debts and strong acreage positions could benefit from each other’s strengths to emerge stronger from the current crisis with higher appeal to disgruntled shareholders.
As distress in the Permian and other U.S. major shale plays mounted, many heavily indebted companies filed for bankruptcy to seek protection from creditors, and more continue to do so, unable to meet maturities amid persistently low oil prices and less additional credit available.
But others, those with healthier balance sheets, are looking to strengthen portfolios with value-accretive deals.
Consolidation has started, even if it is happening later and at a slower pace than initially expected, as the COVID-19 crisis and the price crash upended all ‘business as usual’ scenarios for companies around the world, including in the U.S. shale patch. From the supermajors Exxon and Chevron to the smallest drillers, every company has cut capital expenditures and is looking to save costs from every expense item possible, including headcount.
Amid the drive to cut costs by as much as possible, it may look counterintuitive that some companies have announced corporate M&A transactions with prices where they are at the moment.
Chevron’s acquisition of Noble Energy and the Devon Energy-WPX Energy all-stock merger, however, were both seen as strengthening both companies involved in each of the transactions. These days, the industry is looking at adding profitable acreage and shareholder value instead of gobbling up distressed drillers at knockdown prices.
The Chevron deal was positively valued by investors, Adrian Lara, Oil and Gas Analyst at data and analytics company GlobalData, said at the end of last month.
“Although in Q2 Chevron took a substantial loss due to impairments, the company has a relative healthy balance sheet. It remains focused on the Permian and acquired Noble Energy, which increases its Permian acreage, gives it a leasehold in the DJ Basin and opens new opportunities in the international natural gas market,” Lara said.
“In other words, if within the next two years oil demand recovers, certain companies will be best positioned to take advantage of the situation and here is where the measures that Chevron is taking seem right – given their clear intention to remain focused on the oil and gas sector,” the analyst noted.
Another Oil & Gas Analyst at GlobalData, Steven Ho, said that value-accretive M&A activity in the Permian will strengthen operators for a recovery scenario.
“During a downturn in oil and gas, it is not unusual for companies to look out for potential acquisitions, but this is a time when companies need to be very careful with their expenditures,” Ho said.
The positive analyst views of the two large M&A deals in the shale patch this year are in stark contrast with the opinions about last year’s Occidental-Anadarko deal, which analysts now see as an ill-timed decision to pursue such a huge and leveraged transaction.
The ConocoPhillips-Concho deal would also be positive for both companies, analysts say. ConocoPhillips will gain a large Permian acreage - something it lacks now, while Concho could mitigate regulatory uncertainty in case of a Joe Biden Administration, which would move to ban new fracking on federal land. About 20 percent of Concho’s net acreage position is on federal lands.
ConocoPhillips CEO and chairman Ryan Lance himself told CNBC in April that “the industry does need to consolidate to cut fixed costs” and that Conoco was “on the lookout” for potential acquisition targets, but a possible deal needs to be accretive and not destroy the company’s financial framework.
Announcing the deal with Concho today, Lance said:
“Opportunities to consolidate quality on the scale of these two companies do not come along often, so we are seizing this moment to create a company to lead the necessary transformation of our vital sector for the benefit for all stakeholders in the future.”
The M&A in the U.S. oil industry is well underway, but just like investors in oil, drillers will be very picky in choosing targets or partners to weather the downturn and emerge stronger from it.
By Tsvetana Paraskova for Oilprice.com
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