The current oil and gas downturn could spur a wave of consolidations across the US shale plays

GlobalData Energy 17 November 2020 (Last Updated November 17th, 2020 15:54)

The current oil and gas downturn could spur a wave of consolidations across the US shale plays

GlobalData’s latest report, ‘Unconventional Production in the US Lower 48, 2020’, provides a comprehensive review of the US shale oil and gas appraisal and development activity against the backdrop of the Covid-19 pandemic. It highlights the potential for strategic mergers and acquisitions (M&As) in the US shales amid low valuations and an uncertain outlook.

The current industry downturn is proving to be difficult for many shale drillers. Low oil prices, coupled with rising debt and weak liquidity profile is causing companies like Whiting Petroleum and Chesapeake Energy to file for bankruptcy protection. However, the downturn has also presented companies with an opportunity to acquire distressed operators or merge two companies to increase operational scale and efficiency. Operators with strong balance sheets and a clear strategy to remain in oil and gas can, indeed, benefit by expanding their portfolio through acquisitions of assets available at a discount. Majority of the recent deals in the US involved significant unconventional acreage, especially from the Permian Basin. This basin remains the most attractive acreage in the US Lower 48. It provides very competitive payback periods, measured in months, unlike offshore projects, where the payback periods are usually measured in years.

Since the beginning of Q3 2020, there has been renewed optimism in the US shales, leading to some large value M&As in the country. This was kick-started by Chevron’s acquisition of Noble Energy for $13bn. This deal was followed by three major announcements, namely, the Devon–WPX merger, acquisition of Concho Resources by ConocoPhillips, and the most recent acquisition of Parsley Energy by Pioneer Natural Resources. This new-found enthusiasm may further spur a few more M&As across the US oil and gas industry.

Production Comparison from Independent Producers Post M&A

The announced Pioneer Natural Resources-Parsley Energy deal is estimated at $4.5bn. It is the combination of two pure Permian players that would result in Pioneer holding approximately 930,000 net acres in the Midland and Delaware basins. The consolidation would create great synergy in terms of operational efficiency due to the increased scale of operations and could help the company sustain even if the crude oil price remains low for an extended dilatation. Besides, both companies do not hold any federal land, reducing their risk exposure to the potential ban on fracking on federal lands. The deal between Pioneer and Parsley Energy would create the largest independent producer in the Permian Basin with Occidental dropping to second.