ir Winston Churchill once urged leaders never to let a good crisis go to waste, and Big Oil rarely failed to heed the advice. Under normal circumstances, energy downturns have created perfect opportunities for deep-pocketed oil and gas heavyweights to land blue chip assets on the cheap. A good example: The last oil crisis of 2016 was followed by a significant number of M&A deals in the sector, including the $ 60 billion merger between Royal Dutch Shell (NYSE: RDS.A) and BG Group, Canadian Oil Sands and Suncor EnergyEnergy, as well as a handful that have failed, including the proposed merger between Halliburton (NYSE: HAL) and Baker Hugues (NYSE: BKR).
But Big Oil has now ditched that old playbook and seems largely disinterested in some M&A action this time around.
The current year is shaping up to be one of the slowest in the oil and gas industry on mergers. According to data compiled by Bloomberg, so far $ 86 billion in takeovers have been announced, pending or completed in the current year, on track for one of the dullest years for energy connections in two decades.
Oil executives seem too timid to pull the trigger on the many distressed assets that became available after the last oil recession – and for good reason.
After all, the latest wave of mergers and acquisitions has turned into a disaster for many acquiring companies.
Last year, Royal Dutch Shell reduced its dividend from US $ 0.16 per common share to US $ 0.4, a decrease of 66%. It was the first time the company had cut the dividend since World War II, a testament to the seriousness of the oil massacre, which Shell blamed in its press release. However, there could be another culprit to blame for the dramatic reduction: the company’s acquisition of BG Group in 2016, which cost it $ 60 billion.
Western Oil‘s (NYSE: OXY) The $ 55 billion leveraged buyout of Anadarko has become the iconic child of oil and gas mergers gone awry. The deal turned into a complete disaster, leaving the company in deep distress over its mountain of debt and jokes about how it could itself be acquired at a fraction of what it got. paid for Anadarko.
Big Oil’s high debt levels are also to blame; Cowen pointed out BP Plc. ‘s (NYSE: BP) extremely high debt, although it has less to do with its 2018 merger with BHP Billiton for $ 10.5 billion and more to do with its Deepwater Horizon oil spill that cost it $ 65 billion. dollars in cleaning costs and legal fees over the years.
BP’s debt-to-equity ratio of 0.87 is well above the oil and gas industry average of 0.47, and the highest among oil supermajors.
BP is not alone in facing the debt conundrum.
While Chevron (NYSE: CVX), Shell (NYSE: RDS.A), and TotalEnergies (NYSE: TTE) have all announced a return to share buybacks during the current earnings season, ExxonMobil (NYSE: XOM) chose to pay down debt rather than reward shareholders. Exxon suspended buybacks in 2016 as it carried out one of the most aggressive shale expansions, particularly in the Permian.
WSJ heard in the streetJinjoo Lee claims that Exxon has less flexibility than its peers thanks to years of overspending followed by a brutal 2020. Tops.
Fortunately for XOM shareholders, CEO Darren Woods reassured investors that reinstating buybacks was “on the table”, although he reiterated that “restore the strength of our balance sheet, reduce debt to levels compatible with a strong double A rating “ remains the top priority.
Cowen, however, says oil majors like Chevron and Total with relatively strong balance sheets could opt for cheap assets like GALP Energia (GALP.Portugal) or BP’s stake in a gas project in Oman.
Instead of mergers, oil and gas companies prefer to keep the dividend very large or reduce capital spending in an effort to preserve liquidity. This is a trend that we have clearly seen in the last results season.
Global oil and gas companies have continued to refrain from increasing their capital spending budgets as they attempt to maintain capital discipline.
According to RBC, the overall capital budget of the 190 oil and gas companies tracked by the company is expected to increase 4% to $ 348 billion from $ 334.7 billion in 2020, but a good 25% below 2019 levels. of $ 461.7 billion spent.
The most spenders Saudi Aramco (ARMCO) and PetroChina (NYSE: PTR) are expected to spend a total of $ 170.3 billion this year, up 12% from 2020 levels but 3.4% below 2019 levels.
The combined spending of the world’s seven largest oil companies is expected to total $ 78.2 billion in 2021, just 1% more than the $ 77.8 billion spent in 2020 and 20% less than the $ 110 billion spent in 2020. 2019.
Not everyone shares Cowen’s bearish M&A outlook, however.
Goldman Sachs analyst Michele DellaVigna said the highly fragmented US shale industry could still be a candidate for a wave of consolidations.
DellaVigna admitted that we probably won’t see a repeat of the mega-mergers of the 1990s; However, he says there are financial arguments to be made for mergers, especially in an industry like U.S. shale that previously lacked cost discipline:
“The petroleum industry has posted its best corporate returns during a period of consolidation, financial tightening and rising barriers to entry. We believe that this environment (and the pressure from shareholders for decarbonization) could lead to a phase of consolidation and capital discipline similar to that of the late 1990s.. “
By Alex Kimani for Oil Octobers
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