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MarketScreener Homepage  >  Indexes  >  USA  >  S&P 500    SP500

S&P 500

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U.S. shale mergers accelerate, as Pioneer-Parsley deal joins roster

10/20/2020 | 08:04pm EST
FILE PHOTO: A horizontal drilling rig on a lease owned by Parsley Energy operates in the Permian Basin near Midland

HOUSTON/NEW YORK (Reuters) - Consolidation in the U.S. shale industry is accelerating, ratcheting up pressure on oil and gas producers to gobble up smaller rivals, analysts and executives said.

Pioneer Natural Resources Co, one of the largest independent shale operators, joined the ranks of dealmakers as it announced on Tuesday a low-premium $4.5 billion buyout of Parsley Energy Inc.

The coronavirus pandemic has slashed oil demand and forced struggling shale producers to cut costs. Crude prices have slid about a third this year but drillers still must invest to maintain the same rate of production as the output of existing shale wells decline. Global majors are not likely to step in, so analysts expect the dwindling universe of notable producers to seek out deal partners.

"The universe of companies with which you can combine is shrinking by the day," said Matthew Portillo, managing director at investment bank Tudor, Pickering, Holt & Co.

On Monday, Concho Resources Inc agreed to sell to ConocoPhillips for $9.7 billion. That followed Chevron Corp's $4.2 billion purchase of Noble Energy this month, and Devon Energy Corp's $2.6 billion all-stock, low premium buy of rival WPX Energy Inc in September. European majors are avoiding new oil and gas purchases and Exxon Mobil Corp is cutting costs, making them unlikely candidates for a deal.

"It seems like the best companies have been picked off," said Scott Sheffield, CEO of Pioneer Natural Resources, in a call with analysts on Tuesday, adding that he did not see many more deals to come. "Leverage is going to prevent consolidation in the next few years."

"Those without very strong balance sheets are trying to survive," Concho Resources Chief Executive Tim Leach said in an interview on Monday, when the Conoco deal was announced. Leach said companies with stronger balance sheets will buy weaker firms.

Investors are increasingly looking for companies with market values of at least $5 billion, preferably those that pay dividends. While most of the larger shale firms pay dividends, a Refinitiv Eikon index of U.S. oil-and-gas producers has lost 55% this year, compared with the S&P 500's 7.4% rise.

"The outlook for the smaller companies in the sector has diminished," Portillo said.

Buyers could include Marathon Oil Corp, Apache Corp and EOG Resources Inc, while Cimarex Energy Co and PDC Energy Inc are top consolidation candidates, Portillo said.

Financial firms could emerge as buyers, as many companies carry heavy levels of debt. North American producers have around $86 billion of rated debt maturing through 2024, according to Moody's Investors Service.

"It's going to take the banks to take over companies and consolidate them into bigger companies," said one shale executive.

Bankruptcies are up 21% so far this year among energy producers, according to law firm Haynes and Boone.

Even combined companies would "still have to walk the tightrope" between trying to return capital to shareholders and spending to keep depleted shale fields pumping, said Andrew Dittmar, M&A analyst at Enverus.

Shale output rebounded during the summer after the initial pandemic-induced lockdowns, but companies are investing less now. Shale production is expected to fall by 123,000 barrels per day in November, the largest drop since May, according to U.S. Energy Department figures.

Deals must add to cash flow, not add too much debt and have small premiums, said Jennifer Rowland, analyst with Edward Jones. "Any deal that requires significant cost savings or a higher oil price to justify the price paid will not be well-received," she said.

(Reporting by Jennifer Hiller in Houston and David French and Devika Krishna Kumar in New York; Editing by Marguerita Choy and Sonya Hepinstall)

By Jennifer Hiller and David French


© Reuters 2020
Stocks mentioned in the article
ChangeLast1st jan.
APACHE CORPORATION 0.57% 14.12 Delayed Quote.-44.82%
CHEVRON CORPORATION -3.64% 92.14 Delayed Quote.-23.54%
CIMAREX ENERGY CO. -2.06% 37.99 Delayed Quote.-27.62%
CONCHO RESOURCES INC. -1.80% 63.37 Delayed Quote.-27.64%
CONOCOPHILLIPS -1.76% 43.63 Delayed Quote.-32.91%
DEVON ENERGY CORPORATION -1.18% 15.12 Delayed Quote.-41.78%
DJ INDUSTRIAL -0.58% 29872.47 Delayed Quote.4.67%
EOG RESOURCES, INC. -2.61% 53 Delayed Quote.-36.72%
EXXON MOBIL CORPORATION -2.79% 40.81 Delayed Quote.-41.52%
LONDON BRENT OIL 0.75% 48.07 Delayed Quote.-26.00%
MARATHON OIL CORPORATION -0.31% 6.43 Delayed Quote.-52.65%
NASDAQ 100 0.60% 12152.215271 Delayed Quote.39.15%
NASDAQ COMP. 0.48% 12094.402197 Delayed Quote.34.79%
NOBLE ENERGY, INC. 1.44% 8.46 End-of-day quote.-65.94%
PARSLEY ENERGY, INC. -0.86% 13.79 Delayed Quote.-27.08%
PDC ENERGY, INC. -2.12% 18.45 Delayed Quote.-29.50%
PIONEER NATURAL RESOURCES COMPANY -1.25% 109.96 Delayed Quote.-27.36%
S&P 500 -0.16% 3629.65 Delayed Quote.12.35%
WPX ENERGY, INC. -1.53% 7.74 Delayed Quote.-43.67%
WTI 0.88% 45.4 Delayed Quote.-25.37%
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