Nervous oil market could trigger Permian consolidation

The U.S. shale industry first experienced a wave of consolidation in 2015 when prices fell after Saudi Arabia fully turned on the taps in response to growing shale production. Since then, consolidation has continued, albeit unevenly.

But he’s about to get some extra momentum.

According to industry executives, the recent increase in price volatility will prompt more companies to consolidate, especially in the Permian, the star of shale games. Another reason for continued consolidation is uncertainty over the future of fossil fuels as part of the renewable energy campaign, the Houston Chronicle reported this week.

Indeed, there is cause for concern. Prices are already excessively volatile with the lingering pandemic, the lack of evidence that mass vaccination creates herd immunity, and the emergence of the new Omicron variant, which has made the question of herd immunity moot. In fact, the industry is now starting to suspect that prices could rise too high.

“I’m afraid it gets too high, above $ 100 (per barrel),” Scott Sheffield of Pioneer Natural Resources told Reuters in an interview with the World Petroleum Congress. “I hope it stabilizes between $ 80 and $ 100 over the next few years. We need stability in the oil markets.”

Consolidation is one way to achieve stability, as you would have fewer players in an area and therefore fewer divergent views on the right level of oil production. As an example, IHS Markit research earlier this year indicated that U.S. shale oil production was on the rise despite reluctance by large companies to return to a growth strategy. It turned out that production was increasing thanks to small private independents who did not have shareholders to whom to remit money.

“The consolidation of our industry is a force that is not going to slow down,” said Tim Leach, former managing director of Concho Resources, which Conoco acquired earlier this year. “I think our industry needs to be consolidated. There are advantages to having size and scale,” he added, quoted by the Houston Chronicle.

These benefits include exploiting economies of scale and becoming more competitive even at lower oil prices, although few seem to expect lower prices in the near future. Large companies can also obtain financing more easily from banks, notes Chron’s Paul Takahashi, although that may change before too long as ESG pressure increases on lenders for cash-strapped oil and gas projects.

Besides these benefits, there are better and worse times to grow through acquisitions and now it turns out to be a better time: Rising oil prices have relieved companies of much of their debt. and that, according to Pioneer’s Sheffield, “gives you options.”

“That’s why we’ve taken advantage of the market over the past 18 months to make two significant acquisitions. I think you’ll have another round of consolidation over the next three to five years,” he told the Houston Chronicle.

The U.S. shale industry is expected to spend $ 18.4 billion next year, according to Rystad Energy. That’s 19.4 percent more than what he spent this year. However, half of the increase in spending will be due to cost inflation, which will add up to $ 9.2 billion of the combined 2022 spending bill.

This is all the more reason for mergers and acquisitions in the shale zone, especially since the outlook for inflation remains rather bleak, especially since the Federal Reserve is expected to end its stimulus program in here March next year and start raising interest rates, which will be the start of the end of cheap financing.

On the flip side, these expected developments could also slow the wave of acquisitions in the shale patch. Enverus, for example, expects a slowdown as potential buyers simply run out of acquisition targets, the Chronicle reported this week. Corporate valuations are also on the rise with the price of oil, and the Permian is still considered the mildest place in the shale zone, the drillers who would be exposed to it would be those who would achieve the biggest gains in valuation. .

In this situation, potential buyers can do two things: pause and wait and see where valuations go, or invest more money in acquisitions with long-term uncertainty still hanging over the industry’s heads.

The wait-and-see approach could save buyers money and expose themselves to assets that could become stranded if the green transition gathers pace. Or it could cause them to miss out on opportunities that will never be so good again if the bullish oil price forecasters are right.

The insanity approach could be expensive but give buyers access to a larger resource base at a time of worries about underinvestment in new oil production, despite the green push. It’s not an easy choice to make, especially in the midst of the ongoing pandemic, but it may be a choice some shale companies need to make.

By Irina Slav for Oil Octobers

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