By Irina Slav
Every crisis has its consolidation. At least, that used to be the case before the 2020 oil industry crisis. When earlier this summer Chevron said it would acquire Noble Energy, some may have breathed a sigh of relief that the consolidation was finally beginning. But is it?
“Historically, the oil industry has approached crises with a sense that the given challenges would soon pass, capital would return to the sector, demand would recover, and prices would rebound, often supported by regulatory accommodations,” says Nicholas Renter, vice-president of sales at M&A SaaS services provider Datasite (former Merrill Corporation). With the attitude that a crisis is as much a problem as an opportunity, these companies, Renter says, have used crises to take bold, yet calculated moves.
What we are having this year, however, is not your daddy’s oil price crash. The perfect storm of low oil prices and low oil demand battered the industry and fogged the future to such an extent that nobody is certain there is an opportunity in this particular crisis.
Some anticipated it. In May, EY released a report on a survey among oil and gas executives that noted most of them had already begun to worry about the effects of the oil price crash on their industry and the global economy. EY assumed that this state of affairs could prompt a consolidation wave but pointed out what made this hypothetical consolidation drive different:
“Significantly lower valuations will bring buyers to the bargaining table; however, this may not be enough to close deals. Buyers will likely evaluate potential targets more broadly, looking at resilience beyond financial metrics to encompass long-term value and premiums related to carbon risk.”
This does not mean there will be no mergers and acquisitions in oil at all. At the moment, most M&A activity is limited to “cherry-picking of individual assets from distressed situations”, as Renter puts it, but this may change going forward. As long as those debt-laden drillers that are having a hard time turning in a profit at current oil prices clear some of that debt.
The U.S. shale patch is an obvious focus of attention for M&A activity. There are a lot of troubled companies there, many of them with assets that may be worth buying, and buying soon.
“Given the upcoming presidential election and the possibility of changed priorities, the potential for near-term domestic M&A is significant,” Renter told Oilprice.com. “That’s why we are seeing more and more companies preparing now so they are ‘deal-ready’ for any opportunity.” Even with that deal-readiness in place, this year won’t be good for mergers and acquisitions in oil and gas. Some analysts are noting that most companies are cautious and not really in a rush to snap up cheap assets put up for sale by their troubled owners. In support of this view, the latest data shows that deal activity during the second quarter in the North American oil and gas sector fell by close to 43 percent from the final quarter of 2019. And 2019 was a slow year for oil and gas M&As.
“No one has experienced an M&A market as bad as this,” Wood Mackenzie’s chief analyst Simon Flowers wrote in a July report. “The collapse in oil and gas prices and Covid-19 killed deal activity, with 2020 so far recording the smallest number of deals in any month, any quarter and any half-year.”
So, deal activity is one more aspect of the industry that has been affected in an unprecedented way—this “unprecedented” factor that has messed up the ordinary course of the oil and gas cycle. Unlike before, now nobody knows if prices for oil and gas will rise high enough soon enough to make an acquisition worth its own price. And then, priorities have changed, as Flowers noted in his report. It is not growth that tops the list anymore, it is resilience and sustainability.
In this context, the Chevron/Noble deal, as well as BP’s sale of its petrochemicals business to Ineos, is likely to remain one-offs rather than the start of an M&A wave, at least for the time being. Nobody wants to sell too cheaply. Noble was forced to sell at a substantial discount by circumstances, and the fact the sale actually began as a sale of a 50-percent stake in the Leviathan gas project is also telling. It suggests Noble had little chance of survival on its own even if it sold the Leviathan stake to Chevron.
This may be true of other companies as well, especially those whose debt load is a hefty as Noble’s, which exceeded its price tag in the Chevron deal by $2.5 billion. Yet buyers like Chevron would be few, according to analysts, unless things change dramatically with oil prices and demand.
“It’s possible there will be continued consolidation, particularly among platform companies, several of which could facilitate sizable acquisitions or a large-scale merger, based on their balance sheets, competitive positioning, and access to capital,” Datasite’s Renter told Oilprice.com. “Still, valuation and realizable synergy will ultimately determine the viability of any significant transaction.”
It will take a while, said Wood Mac’s Flowers in July. Noting the U.S. shale patch was particularly ripe for consolidation given the multitudes of independent drillers active there, Flowers said it would not happen fast.
“Few aspiring predators have access to capital to take advantage of a buyers’ market. And the Majors’ pursuit of resilience and sustainability suggests they are more likely to be sellers of assets than buyers.”
The current crisis is upending every single aspect of the oil and gas industry, it seems, and merger and acquisition activity is no exception.