Oil Industry Turns to M & A for future growth

The once mighty oil and gas industry is flailing, desperately trying to survive a pandemic that has sharply reduced demand for its products. Most companies have cut back drilling, laid off workers and written off assets. Now some are seeking out merger and acquisition targets to reduce costs. ConocoPhillips announced on Monday that it was acquiring Concho Resources for $9.7 billion, the biggest deal in the industry since oil prices collapsed in March. The acquisition, days after the completion of Chevron’s takeover of Noble Energy, would create one of the country’s biggest shale drillers and signals an accelerating industry consolidation as oil prices languish around $40 a barrel, just above the levels many businesses need to break even. Just last month Devon Energy said it would buy WPX Energy for $2.6 billion. But many investors are not sure such deal making will be enough to protect the industry from a sharp decline. The share prices of ConocoPhillips and Concho closed down by about 3 percent on Monday. The big problem is that the fortunes of oil companies are fundamentally tied to oil and natural gas prices, which remain stubbornly low. Few experts expect a full recovery of oil demand before 2022, and some analysts have gone so far as to declare that oil demand might have peaked in 2019 and could slide in the years to come as the popularity of electric cars grows.

“There’s a lot more red ink than there is black gold,” said Michael Lynch, president of Strategic Energy and Economic Research, who periodically advises the Organization of the Petroleum Exporting Countries. “Companies are trying to hunker down and weather the storm. Most people don’t think the oil price will recover for a couple of years.” More than 50 North American oil and gas companies with debts totaling more than $50 billion have sought bankruptcy protection this year. Among the casualties was Chesapeake Energy, a shale pioneer based in Oklahoma City. More failures could come in the next two years as companies are required to repay tens of billions of dollars in debt. Oil companies are facing daunting uncertainties, particularly as concerns over climate change mount and governments impose tougher regulationsto reduce greenhouse gas emissions caused by the burning of fossil fuels. Small companies fear a crackdown on methane leaks and tightening regulations, especially if former Vice President Joseph R. Biden Jr. becomes president and Democrats take control of the Senate. European oil companies have already begun pivoting away from oil and gas, plotting investments in renewable energy like wind and solar to attract new investors. While those companies have had limited success so far, American companies have for the most part stuck with their traditional businesses. They have adapted to low oil and gas prices by slashing investments by 30 percent or more. The oil and gas rig count has dropped by 569 since last fall, to only 282 operating across the country. Oil companies are hoarding cash and renegotiating contracts with service companies that drill and complete wells. Rig rental rates are down roughly 10 percent, pressuring the companies that do the field work. More than 100,000 American oil workers have lost their jobs in recent months.

ConocoPhillips, the largest American independent oil company, has been something of an outlier, recently raising its dividend and buying back shares. Nevertheless, ConocoPhillips’s stock price has dropped by roughly half so far this year. The company is a major producer in the Bakken shale field of North Dakota and the Eagle Ford shale field in South Texas. By acquiring Concho, it will become a major player in the world’s most lucrative shale field, the Permian Basin, which straddles West Texas and New Mexico. With Concho’s 550,000 acres in the Permian, ConocoPhillips will more than triple its 170,000-acre position in the basin, which became the world’s most productive oil field last year. Concho is little known outside Texas but became a major oil producer after it bought RSP Permian for $9.5 billion in 2018. Concho produced more than 300,000 barrels in the second quarter. “Together ConocoPhillips and Concho will have unmatched scale and quality,” said Ryan M. Lance, ConocoPhillips’s chairman and chief executive, referring to their joint balance sheet, resource reserves and personnel. The deal would help make ConocoPhillips one of the largest players in the Permian, putting it in the same league as companies that are much bigger than it over all. “The combination is remarkable,” said Robert Clarke, a vice president and oil analyst at Wood Mackenzie, a research and consulting firm. “Just in regards to scale, ConocoPhillips is adding enough Permian production to nip at the heels of ExxonMobil’s massive program.”

As the shale industry grew over the last decade or so, many smaller companies poured billions of dollars into the Permian and other parts of the country. Now, the process appears to be headed in the opposite direction as the industry retrenches and becomes smaller.

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