Permian Bankruptcies Could Fuel A Buying Spree For Big Oil

(FILES) -- A general view shows 09 March 2004 the Shaybah mega-project, the first, and so far sole, oilfield development in Saudi Arabia's vast al-Rub al-Khali desert, some 800 kilometers (500 miles) southeast of the eastern oil center of Dhahran. World oil prices shot higher 01 June 2004 as fears of disruption to supplies from number one exporter Saudi Arabia intensified after insurgents killed 22 people in the kingdom over the weekend. The Shaybah mega-project, which sits on top of some 15 billion barrels of proven oil reserves, more than a drop in the ocean of Saudi Arabia's estimated total reserves of about 260 billion barrels, has been producing oil to the tune of 600,000 barrels per day (bpd) for less than a dollar a barrel. AFP PHOTO/Bilal QABALAN (Photo credit should read BILAL QABALAN/AFP/Getty Images)

By Haley Zaremba

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The United States shale revolution is over. Production in the Permian Basin, which spreads across West Texas and Southeast New Mexico, has been slowing for months, but the novel coronavirus took things from bad to much, much worse for U.S. shale. The oil price shock that followed the spread of the COVID-19 pandemic, combined with a massive global oil glut spurred by a spat between with learning OPEC+ member countries of Russia and Saudi Arabia, drove West Texas Intermediate oil prices down to a previously unthinkable -$37.63 a barrel earlier this month.  While shale prices have since moderately rebounded, the Permian Basin is still in bad shape. The oil fields that made the United States the biggest crude oil producer in the world is now seeing tens of thousands of fired and furloughed employees as the region is rocked by a sweep of bankruptcies across the shale sector. Last week CNBC reported that “the oil industry shakeout is just beginning with more production cuts and bankruptcies ahead,” detailing that “U.S. oil companies are already paring back spending and closing wells, but wild trading in the futures market was a warning to curb production now because the world at some point will not be able to store any more supply.”

Just because the U.S. oil industry has hit a rough patch, however, doesn’t necessarily mean that the West Texas shale play is all played out. In fact, it stands to reason that, as competition dries up and blows away like so many tumbleweeds, Big Oil may step in and buy up faltering shale independents.

Not all industry experts agree on this outlook, however. “It may be tempting to think oil giants like Exxon Mobil Corp. will swoop in and pick up smaller crude producers at bargains, given the debt on a wide swath of weaker energy companies now trades at fire-sale prices, reported MarketWatch earlier this week. “But a takeover spree won’t be so easy to pull off, as depressed crude prices leave even the sector’s energy stalwarts without a clear picture of their own product’s worth. There’s also unease about when, and how much, crude will be needed once the coronavirus threat subsides.”

According to Bryant Dieffenbacher, an analyst for Franklin Templeton, “there are a lot of uncertainties, but perhaps the biggest of those is the price of oil.” He told MarketWatch that any potential candidates for mergers and acquisitions in the shale game to be “one-off, and driven by unique circumstances, rather than a widespread industry trend.”

In fact, the extreme volatility of the oil markets has led many industry experts to question whether investors should continue to put their money in oil at all. It was already common sentiment that the oil industry has kissed its glory days goodbye as the world edges further into a global energy transition in the face of catastrophic climate change. Even Saudi Aramco, in the biggest initial public offering in history, acknowledged that they expect to see peak oil by mid-century.

As the pandemic turns the entire global energy sector on its head, the World Economic Forum has suggested that if there were ever a time for an energy revolution, that time is now. The international economics organization posited the question, “as coronavirus shocks the energy sector and economy, is now the time for a new energy order?” in an article earlier this week. The answer, according to their writers, seems to be yes.

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