Last week, I moderated a panel ("M&A Outlook: Consolidations, Acquisitions and Divestitures") at the IPAA Private Capital Conference at the JW Marriott in Houston, TX. The attendance was quite good and a number of additional seats had to be set up at the back of the ballroom to accommodate all the attendees. The mood at the conference was somber, but resolute. A number of themes were mentioned repeatedly, and I think it's safe to say they represent something of an industry consensus on the state of the industry and how it needs to move forward.
- The Industry Has Fundamentally Changed – The days of "lease and flip" are over. Management teams (public and private) will be judged on their ability to deliver returns, demonstrate capital discipline and operate a business over several years.
- Cash Flow Is King – With the capital gains model in retreat, investors will look to companies that can generate strong equity returns and reward investors with dividends.
- Scale Is Becoming Even More Important – Investors prize the strong balance sheets and free cash flow generation that typically accompany larger firms. Low-cost of capital is again becoming an important competitive advantage.
- ESG Issues Are Not Going Away – More and more investors are demanding increased accountability regarding ESG issues; many companies are responding accordingly in their business models, operational practices and disclosures.
- An Abundance Of Undeveloped Hydrocarbons Is Diminishing The Importance Of Undeveloped Inventory – Investors are more concerned about companies' current margins and returns than whether they have decades of drilling inventory.
- Consolidation Is Necessary And Is Coming – The industry was overcapitalized and many companies are not delivering what investors want. To gain scale, reduce costs and focus on core assets, a significant amount of consolidation needs to occur.
- Restructurings Are Likely To Be Significant In 2020 – Poor geology, unfavorable pricing and limited capital will make it impossible for some companies to grow their business and meet their debt obligations. With an anemic M&A market, there will be limited opportunities for companies to sell their assets, so debt restructurings are expected to rise.
- Despite Becoming A Major Exporter, The U.S. Isn't The Global Swing Producer – U.S. oil output is expected to continue to grow to a maximum of around 14 million barrels per day (MMbbl/d), but Saudi Arabia, Russia and some non-state actors will adjust supply to balance the market.
- Novel Sources Of Capital Are Being Pursued, But They're Not For Everyone – Asset-backed securities and foreign exchange listings are options, but deal flow has been muted and transactions are more difficult.
- Despite Headwinds, There's Reason For Optimism – The oil and gas industry has some of the smartest, hardest-working and most resourceful business people in the world. They have risen to great challenges before and I sense greater determination to begin to resolve the industry's problems in 2020. There seems to be a stronger awareness of the realities facing the industry and people seem ready to move forward.
Originally published in the Red Weekly E&P Weekly Update Newsletter, January 28,2020