The year 2020 turned out to be an especially rough one for the
Oil/Energy
market, with the coronavirus pandemic destroying demand amid a huge glut in supplies. Crude prices tanked and in an unprecedented turn of events, even went negative for a while. The commodity’s collapse threatened the industry’s creditworthiness by hurting cash flows, drying up liquidity and narrowing profit margins.
In these trying circumstances, the sector operators resorted to merger and acquisition (“M&A”) deals to cut their average costs and benefit from a geographical overlap, leading to per-share accretion.
In particular, scale has become more necessary than ever in the current environment. Amid the specter of doom and gloom, dealmaking is primarily seen as a way to achieve a wider reach and prune overhead, in the process improving the resulting company’s financial discipline.
Here is an overview of the five major energy deals from 2020:
1. ConocoPhillips-Concho Resources ($9.7 billion)
On Oct 19, upstream biggie
ConocoPhillips
COP
confirmed its decision to take over Permian pure play
Concho Resources
CXO
in an all-stock transaction, valued at $9.7 billion. The largest energy deal since the outbreak of coronavirus is believed to have catapulted ConocoPhillips to Permian’s No.2 producer behind Occidental Petroleum. Per the agreement, each shareholder of Concho Resources of will get 1.46 shares of ConocoPhillips. Thus, the transaction has valued Concho at a 15% premium to its closing price on Oct 13.
By 2022, the combined firm will be able to save cost and capital of $500 million, annually, as estimated by both ConocoPhillips and Concho. The deal is expected to close in the first quarter of 2021. Apart from the all-stock nature of the transaction and the modest premium, another important point that is making most analysts favor the deal is the low debt levels of both ConocoPhillips and Concho. (
ConocoPhillips Confirms $9.7B Acquisition Deal With Concho
)
2. Chevron- Noble Energy ($5 billion)
The first major energy M&A action post the coronavirus-triggered slump saw Zacks Rank #3 (Hold)
Chevron
CVX
take over Noble Energy for roughly $5 billion ($13 billion including debt). Announced in July and concluded in October, the transaction provided Noble Energy stockholders with 0.1191 shares of Chevron for each share held.
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The addition of Noble Energy’s assets expands Chevron’s presence in the DJ Basin of Colorado and the Permian Basin across West Texas and New Mexico. The takeover is also estimated to generate potential cost savings of $300 million within a year of closing. The San Ramon, CA-based supermajor now has access to Noble Energy’s low-cost, proven reserves along with cash-generating offshore assets in Israel — particularly the flagship Leviathan natural gas project — thereby boosting its footing in the Mediterranean. (
Chevron Announces Noble Energy Acquisition Deal Closure
)
3. Pioneer Natural Resources- Parsley Energy ($4.7 billion)
A day after ConocoPhillips’ announcement, U.S. shale producer
Pioneer Natural Resources Company
PXD
agreed to buy smaller rival
Parsley Energy
PE
in a $4.5 billion all-stock deal. Pioneer Natural Resources’ Parsley acquisition would solidify the status of the former as one of the biggest operators in the country’s most prolific basin.
In the Permian, the combined company will have 930,000 net acres with a daily production capacity of 558 thousand barrels oil equivalent, as per Pioneer Natural, considering data as of the June quarter of 2020. The proved reserves of Pioneer Natural will also get a boost by roughly 65%, following the deal closure in the first quarter of 2021. (
Pioneer’s $4.5B Buyout Deal With Parsley is Official Now
)
4. Cenovus Energy-Husky Energy ($2.9 billion)
The North American energy space witnessed another major M&A deal in October with
Cenovus Energy
CVE
and Husky Energy’s proposed creation of a new integrated combination. Canada-based Cenovus’ C$3.8 billion (around $2.9 billion) all-share purchase of compatriot Husky Energy is expected to close in early 2021.
The merger will make the combined company the third-largest Canadian oil and natural gas producer, with Cenovus shareholders holding a 61% stake and Husky shareholders owning the remaining shares. Notably, the merger is expected to create a more resilient and stronger Canadian integrated energy leader, with synergies greater than what either company can create individually. In fact, the union is set to generate savings of $1.2 billion within its first year of operation. (
Cenovus & Husky Deal to Create C$1.2B Annual Synergies
)
5. Devon Energy-WPX Energy ($2.6 billion)
In September,
Devon Energy
DVN
decided on a $2.6 billion merger agreement with
WPX Energy
WPX
in a bid to strengthen their position in the premier unconventional Permian Basin. Upon completion of the deal — expected by March 2021 — Devon’s shareholders will own 53% of the combined company and the rest will be owned by WPX Energy’s shareholders.
The deal appears to be logical, as both these players have high-quality assets in close proximity. Moreover, both these companies have a focus on developing oil-rich U.S. assets. WPX Energy has gradually transformed itself into an oil-focused company from a natural gas-focused one. Devon, through the divestiture of Canadian assets and Barnett Shale gas assets sale, will focus on four oil-rich U.S. basins. (
Devon & WPX Energy Eyeing Permian Dominance Through Merger
)
Can We Expect More Oil Patch M&As in 2021?
While energy entities are looking for expansion and synergy derivations, investors are putting pressure on value creation and higher returns. They no longer support drilling programs and expansions in the absence of strong cash flows amid low commodity prices. Investors want these companies to reduce costs, improve internal efficiencies, boost share repurchases and increase returns.
In this context, consolidation is viewed as a key to deliver shareholder value. As capital access (both debt and equity) becomes increasingly difficult and expensive, smaller players are counting on willing buyers to revive and accelerate their growth plans. In a nutshell, a bigger entity is expected to have a lower cost of capital. For the acquirer, it leads to large-scale development opportunities.
In particular, the Permian Basin in the West Texas and New Mexico was the hottest U.S. shale play before the coronavirus-induced downturn, and a slew of deals over the past few months with a combined value of more than $20 billion have cemented the view that assets in the region remain attractive investment opportunities.
As it is, a prolonged period of low oil prices has led to the survival of the fittest. Larger companies — especially those with cash to spend — are in a position to take advantage of this opportunity and buy quality assets at cheap valuations. The most vulnerable companies are the ones with increasing levels of debt and distresses assets.
Finally, with WTI crude, the domestic benchmark, bouncing back to nearly $50 per barrel on vaccine-related tailwinds, the investor hunger for M&A deals is likely to remain strong. The flurry of such activities in recent times suggests that stronger companies are lining up to buy the weaker ones.
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