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Alex Kimani

Alex Kimani

Alex Kimani is a veteran finance writer, investor, engineer and researcher for Safehaven.com. 

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Why Oil And Gas Executives Are Reluctant To Pull The Trigger On New Deals

  • U.S. oil and gas dealmaking contracted 65% Y/Y to $12 billion last quarter.
  • Big Oil executives have become increasingly hesitant to pull the trigger after the last M&A wave turned into a disaster for acquiring companies.
  • Demand destruction concerns and recession fears have made acquiring companies more cautious

The last two energy crises that threatened hundreds of energy companies with bankruptcy have rewritten the O&G M&A playbook. Previously, oil and gas companies made numerous aggressive tactical or cyclical acquisitions in the wake of a price crash after many distressed assets became available on the cheap. However, the 2020 oil price crash that sent oil prices into negative territory has seen energy companies adopt a more restrained, strategic, and environment-focused approach to cutting M&A deals.

It’s therefore hardly surprising that Big Oil executives have become increasingly hesitant to pull the trigger after the last M&A wave turned into a disaster for acquiring companies.

According to data released by energy analytics firm Enverus, U.S. oil and gas dealmaking contracted 65% Y/Y to $12 billion last quarter, a far cry from $34.8 billion in last year’s corresponding period, as high commodity price volatility left buyers and sellers clashing over asset values.

"The spike in commodity prices that followed Russia’s invasion of Ukraine temporarily stalled M&A as buyers and sellers disagreed on the value of assets," said Andrew Dittmar, a director at Enverus Intelligence Research.

U.S. benchmark crude oil futures prices briefly spiked to more than $130 a barrel in early March, shortly after Russia invaded Ukraine, but prices have since cooled thanks to recession worries, a fresh wave of Covid-19 as well as demand destruction concerns. Last quarter's high oil and gas prices triggered a rebound in M&A activity, especially from private equity firms.

Enervous has reported that deals by private equity firms saw a significant uptick in the first quarter as they bought assets that oil companies deemed as non-core to their development plans. These assets tended to lay outside oil-prolific areas like the Permian Basin of West Texas and New Mexico.

Related: Saudi Arabia And The UAE Won’t Be Tapping Emergency Oil Capacity

Private equity still has dry powder for deals. They are using this to target assets being tagged as non-core by public companies. Once you step out of the core of the Permian Basin and a few other key areas, competition for deals drops, and these positions are often available at buyer-friendly price points. That said, private equity is still a net seller in the space and likely to remain so for the foreseeable future given the number of investments outstanding and how long that capital has been deployed,” Dittmar has remarked.

Further, there are growing concerns that high oil prices might have caused significant demand destruction, which could hamper an oil price recovery.

On Wednesday, we saw crude oil futures give up their modest gains and dip lower after data from the Energy Information Administration (EIA) revealed unexpected increases in U.S. crude and gasoline inventories.

On Thursday, WTI September crude oil fell to $88 per barrel while October Brent crude fell to $94 per barrel.

U.S. crude inventories jumped by 4.5M barrels to 426.6M barrels, with crude oil stored at the Cushing, Oklahoma, hub increasing by 926K barrels from the previous week to 24.5M barrels, while gasoline stockpiles added 163K barrels to 225.3M barrels. The four-week average of U.S. gasoline consumption is now more than 1M bbl/day below pre-COVID seasonal levels, despite pump prices having fallen for 50 straight days.

There’s another reason though why Big Oil has gone cold on M&A.

M&A Disaster

Cowen analysts have pointed out how the last M&A wave turned into a disaster for the acquiring companies.

In 2020,  Shell Plc (NYSE: SHEL) cut its dividend by a hefty 66%. That marked the first time the company cut the dividend since WWII, a testament of just how severe the oil massacre was, which is what Shell blamed in its press release. However, another culprit was blamed for the dramatic cut: the company’s 2016 acquisition of BG Group, which set it back a whopping $60B.

Occidental Petroleum’s (NYSE: OXY) $55B leveraged purchase of Anadarko quickly became the poster-child of oil and gas mergers gone bad. The deal quickly turned into a nightmare, 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.

Cowen also pointed at BP Plc.’s (NYSE:BP) 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 0.96 is more than double the oil and gas sector’s average of 0.44, and the highest among the oil supermajors. 

Luckily, the situation has improved dramatically since the 2020 oil price crash, with the vast majority of shale companies now printing millions in profits and free cash flow even at current oil prices. We, therefore, could see more M&A activity down the line.

By Alex Kimani for Oilprice.com

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  • Brett Kuntze on August 05 2022 said:
    Many of the dealings was made with full knowledge that they would go bankrupt. They did them anyway to take advantge of unwitted investors drawn into them only to lose money. They thenturned around to sell them to others at fire sales to keep them alive.
    The oil industry was bankrupted long ago. but still allowed to operate with use of idiotic and gullible investors who rant and rave about things lke independence from OPEC..
    Now more andmore of us want total independence from both our own oil producers and OPEC as well. Russia was outed shortly ago.
    WE still cling on oil investements as we buy less and less gas because we realzie taht gas prices has one direction to go that is up! toward $10 maybe by the end of this decade .
    We need renewble energy to move ourselves away from overdependence on fossil fuels .
    We are still so slow on this..
    Many people still think that oil will still be around for a long time to come. Shale rock oil /gas is easy to find but very very very expensvie to extract!!!! many of us will still pay whatever price for gas to drive regardlessly . We dontcare about the rest of us who will not be able to.
    this is the real gist of this story!
    many millions of us will suddenly finid that we cannot afford to pump gas in our used cars, anyway!
  • George Doolittle on August 05 2022 said:
    Sounds like *"Lockdowns"* has had quite the side benefit. How much oil is New Mexico producing at the moment? Oklahoma gasoline prices look set to drop under one US Dollar *IMMINENTLY* goes without says.

    Maybe even the $50 *BILLION* US Dollar Vogtle Nuclear Facility will suddenly get back on track with unemployment looking to head North of 40% down here Carolina way.

    All bullish for ... well imagine great news for creating Pipeline Security in the Southeast anyways. Can't wait for the next episode of Atlanta Housewives! Let's not leave out Housewives of Charlotte, Housewives of Birmingham, Housewives of Nashville, Housewives of Chicago, Housewives of Detroit, Housewives of Ghetto Memphis, Housewives of Reno 911...the list is pretty long all of a sudden #EVICTION #FORECLOSURE #TAX_LIEN #TAX_BASE_COLLAPSE

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