It has taken almost a year of low crude oil prices. But the stage finally looks set for a step up in US shale M&As, with smaller deals expected to dominate rather than full corporate acquisitions.
Hedges that had hitherto cushioned the impact of falling prices are now rolling off, and an impending bi-annual redetermination by banks of oil and gas reserves has left producers with little option but to sell assets.
“The window for financing in the oil and gas sector has essentially shut, given the double dip we have seen in oil prices. Fewer and fewer financing options are available,” bank Houlihan Lokey managing director John-Paul Hanson says.
Whiting Petroleum has sold $300mn in assets in the first half of the year and plans more. “We have been and will continue to reduce leverage by divesting non-core assets, including some of our select midstream assets,” chief executive James Volker said earlier this month. Whiting will aim to “grow from a more efficient asset base”, by concentrating in the Bakken and the Niobrara.
“Selling production doesn’t bother me,” Anadarko’s chief executive Al Walker said earlier this month. “At the right price, we are a seller.”
Devon echoes those views. “We like all our assets, but we are not in love with them,” chief executive Dave Hager said earlier this month.
As the pipeline of available assets grows, EOG Resources is seeking to make “smaller and more tactical” acquisitions. XTO added to its shale portfolio through two deals last month for acreage in Texas’ Permian basin and it may buy more if it sees “opportunities to enhance shareholder value,” it says.
Anadarko will consider acquisitions, but it would “have to be a really good fit” with the “really good footprint we have today”, chief executive Al Walker says.
Producers need to act fast. They spent 83¢ for every dollar earned to repay debt in the 12 months ending 30 June, the Energy Information Administration (EIA) found in an analysis of second-quarter earnings of 44 companies.
“The longer the price downturn lasts, and, perhaps more importantly, the longer market participants think it will last, the more pressure builds from lenders for highly leveraged operators to shore up balance sheets with asset sales,” Deloitte said.