U.S. mergers greet PioneerParsley to healthy shale roster

HOUSTON/NEW YORK 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.

Pioneer Natural Resources Co., one of the largest independent shale operators, joined the ranks of dealmakers as it announced on Tuesday a low-premium US$4.5-billion buyout of Parsley Energy Inc.

The coronavirus pandemic has slashed oil demand and forced struggling shale producers to cut costs as they cope with a suboptimal US$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. agreed to sell to ConocoPhillips for US$9.7 billion. That followed Chevron Corp.'s US$4.2-billion purchase of Noble Energy this month, and Devon Energy Corp.'s US$2.6-billion all-stock, low premium buy of rival WPX Energy Inc. in September. European majors are avoiding new oil and gas purchases and Exxon Mobil Corp. 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 US$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 has lost 55 per cent this year, compared with the S&P 500's 7.4 per cent rise.

“The outlook for the smaller companies in the sector has diminished,” Portillo said.

Buyers could include Marathon Oil Corp., Apache Corp. and EOG Resources Inc., while Cimarex Energy Co., PDC Energy Inc. 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.