Oil Majors Go Bargain Hunting In The Permian
When Occidental and Chevron started the bidding war to buy Anadarko this spring, analysts predicted that it was the beginning of a wave of consolidation in the largest U.S. shale basin, the Permian.
The true consolidation has yet to come, but since this spring, conditions have become more advantageous for Big Oil to take over smaller players in the basin in order to grow their position and production even more.
Despite OPEC's efforts to prop up the price of oil and despite U.S. sanctions taking more than 2 million barrels of oil per day off the market from Iran and Venezuela, WTI Crude prices have lingered range-bound in the $50s, capped by the very same production growth in the Permian and intensified fears of a slowdown in global oil demand growth.
While U.S. shale production is booming and the Permian continues to set new production records, the pace of growth is slowing as many companies have recently scaled back production growth targets while investors and bankers remain skeptical about the shale industry's returns.
The oil price slump in the fourth quarter of 2018 and the investors' now finite patience with shale producers not turning in cash flows have combined to punish the stocks of many big and small U.S. oil drillers in recent months.
Many shale companies operating in the Permian have seen their share prices collapse over the past year, and are now trading at just 4.5 times their earnings before items, half the 9-times-earnings market value just a year ago, according to Bloomberg estimates.
With cheap potential takeover targets, the oil majors are looking to make deals. Low valuation, however, is just one of the factors they will be looking at, and Big Oil is not in a hurry—they could sit on the sidelines and watch more drillers in the shale patch become distressed with debt and become even cheaper before approaching it.
Apart from the right valuation, the supermajors are also looking at whether a potential target would be a strategic fit, and how much value it would bring to the firm and its shareholders.
"I expect consolidation to happen over some period of time," ExxonMobil's chairman and CEO Darren Woods said at the Barclays energy conference this week. Exxon announced earlier this week that it was bowing out of its assets offshore Norway, on top of its intention to back out of its UK North Sea assets as well, as the oil major looks to focus on its assets in the US and Guyana.
"So, we're keeping a watchful eye. I think we're there for the long term. And as opportunities present themselves, we'll take advantage of them," Woods noted.
Jeff Gustavson, Vice President, Chevron North America Exploration & Production Mid-Continent Business Unit, also spoke at the same conference, saying that "We're not under any pressure to transact and I think we demonstrated that earlier this year, not to name any specific situations, but I think we proved that out."
ag9|HOME"That said, we're always looking, we'll take an opportunistic approach like we always have to M&A and that includes what's going on in the Permian Basin. I'm not saying we will transact, but we're always – we're always looking," Gustavson said, enumerating the three key factors that Chevron is looking at in acquisitions—strategic fit, assets competitive to the others in Chevron's portfolio, and the value sense for investors.
A month before the bidding battle for Anadarko started, European supermajor Shell said in March that it was "definitely actively looking at opportunities" to increase its Permian position.
At the start of the bidding war for Anadarko, Wood Mackenzie's Chairman and Chief Analyst, Simon Flowers, said:
"The bidding war for Anadarko is merely the latest episode in the Permian M&A saga. Operationally, the basin is being industrialised. The logical next step from industrialisation is concentration. There are lots more deals to come."
Six months later, conditions are even more favorable for Big Oil to take over larger swathes of the biggest oil production basin in the U.S. Independents may also consolidate among themselves in order to survive.
As the industry matures in the Permian, Exxon and Chevron ramp up production, lower margins, and push out the independents, a white paper commissioned by Hastings Equity Partners in partnership with the University of Houston Energy Research showed last month.
"The Permian Basin used to be a place where wildcatters reigned and now, with technology, the economy is being driven by manufacturing," Ted Patton, founder and managing partner of Hastings Equity Partners, said.
Independent producers have limited resources to boost production, while Exxon and Chevron plan to pump 1 million bpd each in the Permian.
"The inevitable result will be consolidation by independents in an effort to survive," Patton says.
( 译者：段宇??审校：刘海萍 )