Released July 06, 2020 | SUGAR LAND
en
Written by John Egan for Industrial Info Resources (Sugar Land, Texas)--The COVID-19 pandemic, and the social and economic shockwaves it created, likely will fundamentally transform the U.S. Oil & Gas shale industry, driving mergers and acquisitions as well as bankruptcies, but also possibly attracting a new set of investors, according to a recent report from Deloitte (London, England).
Internal and external forces are driving the industry's tumult. The internal reasons derive from the shale industry's legacy of poor returns, even when prices were higher, and the heavy debt they took on to secure acreage and drill fields. Too many companies pursued growth for growth's sake, rather than profitable growth. Eventually, shareholders rebelled and demanded capital be returned to them rather than being sunk into new drilling ventures. For more on that, see August 19, 2019, article - Oil Executives Pledge Financial Probity, Environmental Protection at Denver Conference.
Industrial Info has tracked the Oil & Gas industry's financial struggles. For more on this, see: June 8, 2020, article - IEA Sees 50% Decline for Shale Capex in 2020; May 5, 2020, article - Big Oil Hits the Skids, Battered by Excess Supply, Soft Demand and Low Prices; and April 6, 2020, article - Oil Patch Crisis: The Bricks Begin Falling.
On their own, these internal factors were forcing a gradual financial reckoning, one accelerated a bit by the brief price war earlier this year between Saudi Arabia and Russia, which drove oil prices sharply down. Days after the Deloitte study was released, hydraulic fracturing pioneer Chesapeake Energy Corporation (NYSE:CHK) (Oklahoma City, Oklahoma) filed bankruptcy. Weeks earlier, Whiting Petroleum Corporation (NYSE:WLL) (Denver, Colorado), became the first large fracking driller to file a Chapter 11 petition. This spring, law firm Haynes & Boone L.P. predicted an "avalanche" of bankruptcy filings in 2020. For more on that, see April 28, 2020, article - 'Avalanche' of Oil & Gas Bankruptcy Filings Expected This Year.
"The reality is that the shale boom peaked without making money for the industry in aggregate," noted the Deloitte report, The great compression: Implications of COVID-19 for the US shale industry. "The US shale industry registered net negative free cash flows of $300 billion, impaired more than $450 billion of invested capital, and saw more than 190 bankruptcies since 2010."
The Deloitte report, released June 22, predicted the industry might have to write down the value of its assets by as much as $300 billion. According to the consulting firm, "of the major listed U.S. shale operators, about 30% already are 'technically insolvent,' where their discounted future value at $35 per barrel is lower than their net liabilities." If prices fall to $20 per barrel, nearly half the U.S. shale explorers will be technically insolvent.
The COVID-19 pandemic turned an industry predicament into a calamity -- and an opportunity for some. In April, wide-ranging economic lockdowns around the world cut demand for oil by about 30% overnight, unleashing a cascade of powerful societal and economic forces on shale producers. Around the world and across sectors, workers and employers quickly became accustomed to working from home, which drove down demand for gasoline and diesel. Sales representatives and consultants pivoted to online meetings with clients and prospects, sapping demand for aviation fuel and kerosene. Investors began looking more favorably on less-capital-intensive energy projects like renewable energy that offered the same or better returns, and with less risk, than oil investments. New, shorter supply chains cut into demand for shipping fuels.
These are strategic external trends that promise to reshape the Oil & Gas industry for some time, the report predicted.
Those are the external and internal forces that, when combined, are creating a "great compression" on U.S. shale drillers. Consolidation through M&A is virtually a given, the firm acknowledged, but not all M&A is created equal. The firm created a four-cell infographic to qualitatively display the characteristics of attractive and unattractive M&A candidates. It cautioned potential buyers to avoid the traps that have created woes for buyers.
Without naming names, the Deloitte report identified a group of non-royalty operators, which it termed "the augmentors," that have strong operational and financial profiles that made them attractive merger-of-equals candidates or acquisition targets for international oil companies.
The consulting firm identified another set of shale companies that were risky buys ("value traps") due to their below-average operational excellence but above-average financial strength. These were a "tempting set of companies, but with hampered growth potential and operational agility."
Deloitte called the weakest group of shale operators "superfluous," and urged readers to avoid considering them for a merger or acquisition. This group accounts for about half the industry accounting for nearly 50% of production.
"Oil markets will likely remain volatile and uncertain," Deloitte wrote. "The lingering future of post--COVID-19 uncertainty requires a 360-degree tactical and strategic refresh from the industry."
Companies must first respond to the current market situation and safeguard the business by saving both capital and cost. Firms can progress from responding to recovering with "a rigorous operational diagnosis that is powered by a new engineering mindset, metadata analytics, and sustainability measures." Finally, there is a need for companies to reinvest themselves in order to thrive in what Deloitte sees as the "next 'new normal.' Companies should work toward transforming themselves from an IT-driven mindset to an operationally integrated organization."
Industrial Info Resources (IIR), with global headquarters in Sugar Land, Texas, six offices in North America and 12 international offices, is the leading provider of global market intelligence specializing in the industrial process, heavy manufacturing and energy markets. Industrial Info's quality-assurance philosophy, the Living Forward Reporting Principle, provides up-to-the-minute intelligence on what's happening now, while constantly keeping track of future opportunities. Follow IIR on: Facebook - Twitter - LinkedIn. For more information on our coverage, send inquiries to info@industrialinfo.com or visit us online at http://www.industrialinfo.com.
Internal and external forces are driving the industry's tumult. The internal reasons derive from the shale industry's legacy of poor returns, even when prices were higher, and the heavy debt they took on to secure acreage and drill fields. Too many companies pursued growth for growth's sake, rather than profitable growth. Eventually, shareholders rebelled and demanded capital be returned to them rather than being sunk into new drilling ventures. For more on that, see August 19, 2019, article - Oil Executives Pledge Financial Probity, Environmental Protection at Denver Conference.
Industrial Info has tracked the Oil & Gas industry's financial struggles. For more on this, see: June 8, 2020, article - IEA Sees 50% Decline for Shale Capex in 2020; May 5, 2020, article - Big Oil Hits the Skids, Battered by Excess Supply, Soft Demand and Low Prices; and April 6, 2020, article - Oil Patch Crisis: The Bricks Begin Falling.
On their own, these internal factors were forcing a gradual financial reckoning, one accelerated a bit by the brief price war earlier this year between Saudi Arabia and Russia, which drove oil prices sharply down. Days after the Deloitte study was released, hydraulic fracturing pioneer Chesapeake Energy Corporation (NYSE:CHK) (Oklahoma City, Oklahoma) filed bankruptcy. Weeks earlier, Whiting Petroleum Corporation (NYSE:WLL) (Denver, Colorado), became the first large fracking driller to file a Chapter 11 petition. This spring, law firm Haynes & Boone L.P. predicted an "avalanche" of bankruptcy filings in 2020. For more on that, see April 28, 2020, article - 'Avalanche' of Oil & Gas Bankruptcy Filings Expected This Year.
"The reality is that the shale boom peaked without making money for the industry in aggregate," noted the Deloitte report, The great compression: Implications of COVID-19 for the US shale industry. "The US shale industry registered net negative free cash flows of $300 billion, impaired more than $450 billion of invested capital, and saw more than 190 bankruptcies since 2010."
The Deloitte report, released June 22, predicted the industry might have to write down the value of its assets by as much as $300 billion. According to the consulting firm, "of the major listed U.S. shale operators, about 30% already are 'technically insolvent,' where their discounted future value at $35 per barrel is lower than their net liabilities." If prices fall to $20 per barrel, nearly half the U.S. shale explorers will be technically insolvent.
The COVID-19 pandemic turned an industry predicament into a calamity -- and an opportunity for some. In April, wide-ranging economic lockdowns around the world cut demand for oil by about 30% overnight, unleashing a cascade of powerful societal and economic forces on shale producers. Around the world and across sectors, workers and employers quickly became accustomed to working from home, which drove down demand for gasoline and diesel. Sales representatives and consultants pivoted to online meetings with clients and prospects, sapping demand for aviation fuel and kerosene. Investors began looking more favorably on less-capital-intensive energy projects like renewable energy that offered the same or better returns, and with less risk, than oil investments. New, shorter supply chains cut into demand for shipping fuels.
These are strategic external trends that promise to reshape the Oil & Gas industry for some time, the report predicted.
Those are the external and internal forces that, when combined, are creating a "great compression" on U.S. shale drillers. Consolidation through M&A is virtually a given, the firm acknowledged, but not all M&A is created equal. The firm created a four-cell infographic to qualitatively display the characteristics of attractive and unattractive M&A candidates. It cautioned potential buyers to avoid the traps that have created woes for buyers.
Without naming names, the Deloitte report identified a group of non-royalty operators, which it termed "the augmentors," that have strong operational and financial profiles that made them attractive merger-of-equals candidates or acquisition targets for international oil companies.
The consulting firm identified another set of shale companies that were risky buys ("value traps") due to their below-average operational excellence but above-average financial strength. These were a "tempting set of companies, but with hampered growth potential and operational agility."
Deloitte called the weakest group of shale operators "superfluous," and urged readers to avoid considering them for a merger or acquisition. This group accounts for about half the industry accounting for nearly 50% of production.
"Oil markets will likely remain volatile and uncertain," Deloitte wrote. "The lingering future of post--COVID-19 uncertainty requires a 360-degree tactical and strategic refresh from the industry."
Companies must first respond to the current market situation and safeguard the business by saving both capital and cost. Firms can progress from responding to recovering with "a rigorous operational diagnosis that is powered by a new engineering mindset, metadata analytics, and sustainability measures." Finally, there is a need for companies to reinvest themselves in order to thrive in what Deloitte sees as the "next 'new normal.' Companies should work toward transforming themselves from an IT-driven mindset to an operationally integrated organization."
Industrial Info Resources (IIR), with global headquarters in Sugar Land, Texas, six offices in North America and 12 international offices, is the leading provider of global market intelligence specializing in the industrial process, heavy manufacturing and energy markets. Industrial Info's quality-assurance philosophy, the Living Forward Reporting Principle, provides up-to-the-minute intelligence on what's happening now, while constantly keeping track of future opportunities. Follow IIR on: Facebook - Twitter - LinkedIn. For more information on our coverage, send inquiries to info@industrialinfo.com or visit us online at http://www.industrialinfo.com.
