U.S. shale mergers accelerate, with Pioneer-Parsley deal looming

PDC Energy

20/10/2020 21:00

By Jennifer Hiller and David French
    HOUSTON/NEW YORK, Oct 20 (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.
    Among those in play, Pioneer Natural Resources Co  PXD.N ,
one of the largest independent shale operators, is considering a
low-premium buyout of Parsley Energy Inc  PE.N , which could be
announced as early as Tuesday, according to sources. 
    The coronavirus pandemic has slashed oil demand and forced
struggling shale producers to cut costs as they cope with a
suboptimal $40-per-barrel crude price, an uncertain outlook, and
the need to invest to keep production flat due to the swift rate
at which shale well output declines. 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  CXO.N  agreed to sell to
ConocoPhillips  COP.N  for $9.7 billion. That followed Chevron
Corp's  CVX.N  $4.2 billion purchase of Noble Energy  NBL.MX 
this month, and Devon Energy Corp's  DVN.N  $2.6 billion
all-stock, low premium buy of rival WPX Energy Inc  WPX.N  in
September. European majors are avoiding new oil and gas
purchases and Exxon Mobil Corp  XOM.N  is cutting costs, making
them unlikely candidates for a deal. 
    "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
 .TRXFLDUSPOILE  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  MRO.N  , Apache Corp
 APA.O  and EOG Resources Inc  EOG.N , while Cimarex Energy
 XEC.N , PDC Energy  PDCE.O  and Parsley are top consolidation
candidates, Portillo said.
    Financial buyers could emerge as buyers, as many companies
carry heavy levels of debt. 
    "It's going to take the banks to take over on companies and
consolidate them into bigger companies," said one shale
executive, who did not think many companies had strong enough
balance sheets to acquire rivals.
    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 high-decline 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.  urn:newsml:reuters.com:*:nL1N2H41N9
    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)
 ((Jennifer.Hiller@thomsonreuters.com; +1 713 210 8538;))