Register with us today

and in less than 60 seconds continue your access to:Latest news headlinesAnalytical topics and featuresCommodities videos, podcast & blogsSample market prices & dataSpecial reportsSubscriber notes & daily commodity email alerts

Already have an account?

Log in to register

Forgot Password

In this list
Natural Gas | Oil

ANALYSIS: Upstream consolidation in near-term likely to target financial metrics, cash flow potential

Electric Power | Energy Transition | Oil | Gasoline

California's clean car ambitions clear first roadblock with Biden win

Oil

Platts Market Data – Oil

Electric Power | Renewables | LNG | Infrastructure Utilities

Caribbean Energy Conference, 21st

Oil | Crude Oil

OPEC+ heads into crunch-time negotiations still in search of unity over 2021 oil quotas

Electric Power | Renewables | Natural Gas (North American) | Crude Oil | Steel | Petrochemicals

Commodity Tracker: 5 charts to watch this week

ANALYSIS: Upstream consolidation in near-term likely to target financial metrics, cash flow potential

Highlights

Low-to-no premium, cost saving deals will be focus

Devon has shrunk in size, may have wanted some bulk

Stable oil price 'likely closed the bid-ask spread': analyst

Houston — As Wall Street lauded big upstream producer Devon Energy's proposed strategic acquisition of fellow "equal" WPX Energy Sept. 28, analysts said it is likely similar deals focusing on improving financial metrics will be seen in the near future, rather than mergers aimed at production growth.

Not registered?

Receive daily email alerts, subscriber notes & personalize your experience.

Register Now

"It looks like E&P consolidation is in the air," investment bank Simmons Piper Sandler Research said in a Sept. 28 investor note.

"[Mergers are] an energy industry imperative given the numerous headwinds buffeting the sector," Simmons said. "We think this transaction answers the call for the sector to identify scale synergies, eliminate costs and improve visibility on capital return, [although] the deal does come as a surprise in the current depressed oil price environment."

The all-stock deal was made at a 2.8% premium to WPX's market cap, which is important as large-premium deals of the past are now considered too rich in the current climate of financial austerity.

"Any [near-term future] mergers consummated will be low-to-zero premium-type transactions that focus on reducing costs, maintaining production and waiting for a better operating environment," KeyBanc analyst Leo Mariani said.

The companies said the would limit production growth, however, with a bias to the status quo if US crude prices remain near current levels.

As long as oil prices remain below pre-pandemic levels, most merger and acquisition activity will be based on combining companies to improve financial metrics by consolidating offices and reducing staff, Rene Santos, an analyst with S&P Global Platts Analytics, said.

"Also, it is likely that deals will be equity-based – no cash as there's none to spare and companies will be reluctant to borrow more money," Santos said.

Alex Beeker, principal analyst for corporate upstream at Wood Mackenzie, said the energy consultancy had "expected Devon to make a move for some time."

Devon production falls

"With $1.5 billion in cash on its balance sheet – albeit earmarked for debt reduction – Devon is on a relatively strong financial footing," Beeker said. "But Devon has been shrinking fast since its disposal program started in earnest about two years ago. The company's net production [325,000 boe/d in Q2] is down 40% since 2018."

At one time Devon had operations in several global basins and production well over 500,000 boe/d, and also enjoyed success as a large US Gulf of Mexico explorer. Devon also kicked off the US shale boom in the early 2000s through its buy of Mitchell Energy, which was credited with discovering the Barnett Shale gas play in North Texas.

The ongoing coronavirus pandemic that began to spread worldwide earlier this year caused oil prices to plunge as crude demand fell off sharply.

With WTI crude hovering around $40/b since late June, that "stability likely [closed] the bid-ask spread," Beeker said.

Even though Devon will enter the Bakken Shale play of North Dakota by buying WPX, some of its other assets could be divestment candidates, he added – notably the STACK play in Oklahoma, which has been all but ignored by investors in the last couple of years for its relative high gas content.

While gas prices have risen recently, larger producers still tend to favor oil basins.

Individual companies suitable for near-term mergers will depend on the specific needs of acquirers, but operators that are struggling financially or have missed payment obligations could be targets, analysts said.

"If we remain in an environment where the general investor appetite for energy remains terrible and uncertainty around oil prices in which demand is clearly terrible [currently], and you have OPEC having to hold back production to prop up prices, I don't think any of that changes a lot – at least for the near future," Mariani said.