By Alex Kimani
The coronavirus crisis and the crash in oil prices has unleashed a new wave of mergers and acquisitions (M&A) in the industry, most evident in the U.S. shale patch. But the wave is inclusive only of prime assets, leaving other less attractive assets in limbo. The consolidation in the oil and gas sector may be well underway, but attractive assets and merger partners could be in short supply as prospective buyers – whose numbers are considerably lower than the number of assets up for sale – have become increasingly picky about assets and acreage they want to add to their portfolios. Potential buyers are being extra choosey and are interested only in top-quality assets and resources that complement their strengths.
One thing buyers are definitely not interested in is any assets that will saddle them with more debt than they can handle.
Analysts expect more deals, not only in the U.S. but also in major basins worldwide, as many international oil companies are lining up oil and gas assets for sale. Big Oil, as well as smaller players, are looking to high-grade their portfolios and get rid of non-core assets to cut debt and focus on long-term strategies to emerge from this crisis better prepared for a world where investors favor low-carbon energy investments.
Quality Over Quantity
Quality over quantity is now the slogan of both sellers and buyers. Sellers want to divest non-core assets to focus on their top-performing projects and resources, while buyers want value-accretive deals with immediate synergies and cash flow generation.
Buyers are so choosy that the potential sellers may not be able to offload all the assets they are looking to dump—and this could leave them saddled with stranded assets they have no intention of developing.
Potential buyers have raised the bar significantly for assets they would be willing to scoop, Julian Mylchreest, Managing Director and Global Co-Head of Natural Resources at Bank of America, said at the Energy Intelligence Forum earlier this month.
Even in the U.S. shale patch, which saw several deals announced in just a few weeks, buyers have been looking for resources that either complement their strategies and portfolios or help them to expand to new areas with low capital requirements in the near term.
“Even after 2020’s merger activity, there is still room left for the industry to consolidate,” Enverus M&A analyst Andrew Dittmar said, commenting on ConocoPhillips’ acquisition of Concho Resources.
“The limiting factor will be the number of attractive merger partners available, both on the seller and acquirer side,” Dittmar noted.
According to Enverus, attractive potential deals are relatively scarce, which could further spur M&A activity in the short term as companies could be pressured to make a deal while there are still attractive acquisition targets and resources available.
“Some of the other well-positioned independents in the Permian with reasonable debt loads are likely the best prospects for a deal,” Enverus says.
Big Oil May Need To Divest US$111 Billion Worth Of Assets
The supermajors also have a load of assets lined up for sale, as many of them focus on only a handful of upstream developments aligned with their long-term goals. The investor push for low-carbon energy sources and the commitment of many European majors to evolve into energy companies from oil and gas companies put additional pressure on the firms to divest low-margin assets and assets with high carbon intensity.
The question is, who will want to buy them?
According to a study from Rystad Energy last month, ExxonMobil, Chevron, ConocoPhillips, BP, Shell, Total, Eni, and Equinor may have to sell oil and gas resources of up to 68 billion barrels of oil equivalent and an estimated total value of US$111 billion, to adjust to the energy transition. A number of potential deals among those major players could be in store as they could be buying portfolios from each other to boost their position in a country they consider a core development area, Rystad Energy said.
The Highest-Risk Assets
Oil majors have recently lowered their long-term price assumptions, and as a result, they have written down billions of U.S. dollars worth of asset values, and some started talking about stranded assets.
France’s Total, for example, booked US$8.1 billion impairments in Q2—of which US$7 billion in Canada’s oil sands—as it cut its short-term price expectations. The only projects identified as “stranded assets” are the Canadian oil sands projects Fort Hills and Surmont, Total said in July.
The supermajors’ assets most vulnerable to oil price fluctuations include oil sands and heavy oil in general, as well as assets requiring high upfront capital expenditure and complex technological solutions, such as floating liquefied natural gas (FLNG) projects, according to Wood Mackenzie.
Among ExxonMobil, Chevron, Shell, BP, and Total, BP showed the most “defensive” portfolio—retaining the most value in a low-price environment and holding steady across base-case and high-price scenarios, according to WoodMac’s analysis. ExxonMobil, on the other hand, loses value from its current portfolio the most quickly in our low-price scenario but would see much larger gains than its peers in a high-price market, with assets largely in tight oil, LNG, and deepwater.
WoodMac’s oil price sensitivity scenarios also showed that “divesting the ‘weakest’ assets doesn’t necessarily strengthen a portfolio.”
Divestitures in the industry will continue as companies of all sizes and geographical focus prepare either for the energy transition or for surviving the capital constraints in U.S. shale. But firms may find it challenging to offload low-margin and carbon-intensive assets as potential buyers would not settle for anything less than high-quality resources and projects.
By Tsvetana Paraskova for Oilprice.com