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Nick Cunningham

Nick Cunningham

Nick Cunningham is an independent journalist, covering oil and gas, energy and environmental policy, and international politics. He is based in Portland, Oregon. 

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The Coming M&A Wave In U.S. Shale

The world’s largest oilfield services companies warned of write-downs and consolidation due to a slowdown in the U.S. shale industry.

Spending cuts by shale drillers could force a consolidation, Halliburton’s CEO Jeff Miller said at the Barclays CEO Energy-Power Conference on Wednesday. Miller conceded that Halliburton’s third quarter earnings will come in at the lower end of its earlier forecast. According to Reuters and Barclays, shale spending could decline by 15 percent in the second half of the year compared to the first half.

Schlumberger, the largest oilfield services company in the world, also warned that it would take a large write-down in the third quarter, without specifying further. The company’s new CEO, Olivier Le Peuch, said Schlumberger would trim its North American onshore operations, which have faced “significant pressure” and “unsustainable margin compression down to mid-single digits.”

The problem for oilfield services companies, which make their money on selling or renting equipment, services and other support for drilling operations, is that oil companies themselves are in deep financial stress. As producers cut back, demand for services evaporates. Worse, producers haggle with companies like Halliburton over pricing, a zero-sum tug-of-war as each side tries to cut costs. For Halliburton and its peers, their position is made worse by the fact that there is an oversupply of equipment and service offerings, which squeezes margins further. We are approaching the one-year mark for when the rig count hit a peak; at this point there is a surplus of rigs sitting around.

But consolidation will hit producers too. Spending cuts, debt and loss of access to capital all mean that struggling shale E&Ps could be scooped up by larger companies. The oil majors – ExxonMobil, Chevron, BP and Shell, for instance – can easily weather the storm in West Texas. Deep pockets, easy access to capital and longer-time horizons mean that a company like ExxonMobil can ramp up spending and drilling during a down period, even if it does not expect its efforts to pay off for years.

Indeed, the majors are now positioning themselves to gobble up weaker companies. Some executives have repeatedly said over the past year that they were waiting until prices and valuations dropped further. They have let struggling E&Ps stew, knowing that the longer they waited, the cheaper their targets would become. Related: Russia To Expand In World’s Fastest Growing Oil Market

“If there is the opportunity to acquire something that brings unique value to Exxon Mobil, we’ll be in a position to transact on that,” Exxon CEO Darren Woods said at the Barclays conference on Wednesday. “Time’s on our side to let that play itself out,” Woods added. “I think people need to recalibrate what they’re experiencing in that unconventional space, and that will have an impact on how people value companies.”

Woods has maintained a consistent and patient line, waiting for valuations to fall. Earlier this year, he said something similar. There is “not always alignment among buyers and sellers,” Woods said in May. ConocoPhillips CEO Ryan Lance echoed that view at the time, saying in May that “a lot of bid-ask issues sitting in the market today,” and that “expectations change” will be needed before the majors plunk down for an acquisition. In other words, executives at struggling shale companies were kidding themselves with what they were asking.

Several months on, Big Oil has even more leverage. As Bloomberg notes, the shale industry is in worse shape than even just a few months ago when Chevron bid for Anadarko Petroleum. WTI has wallowed in the mid-$50s, and investors have begun to abandon the sector.

That means that the majors may finally be willing to begin snatching up battered drillers. Michael Roomberg, who helps manage $4.4 billion at Miller/Howard Investments Inc., told Bloomberg that he expects “several additional deals over the next several quarters, and wouldn’t be surprised if the majors are involved.”

By Nick Cunningham of Oilprice.com

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