Virus Fallout Stokes M&A Across The US Energy Sector

By Glenn Dyer | More Articles by Glenn Dyer

The pace of all paper multi-billion dollar mergers in the struggling North American oil and gas sectors continues to accelerate with three multi-billion dollar share swaps announced in the past week for a total of five since July.

The driver of these deals is low oil prices which are currently just under $US40 a barrel in New York and down more than 35% year to date thanks to the impact of COVID-19 slashing demand for oil products such as jet fuel, diesel, and petrol.

Prices collapsed in April, falling to a negative $US37 a barrel, a plunge that triggered the rising tide of all paper offers. They have struggled to rise and stay above $US40 a barrel for US crude.

The five deals so far announced are worth just on $US25 billion in paper. No cash is changing hands.

The overwhelming trend to paper bid is because cash is at a premium for the struggling fracking sectors as because of the already mentioned factors – weak demand, weak oil prices, pandemic, and slow economic growth which have combined to pressure the sector to rationalise.

The merger surge comes after months of falling production and exploration and development which seems to be turning – active rig numbers have risen sharply in recent weeks – the Baker Hughes report says the number of active rigs is now 211, up 39 since the low of 172 in early August. US output is down from 12.6 million barrels a day at the start of 2020 to around 11 million currently.

The latest deal came on Sunday when Canadian oil and gas producer Cenovus Energy announced the merger with rival Husky Energy in an all-stock transaction valued at $US2.89 billion, inclusive of debt ($C3.8 billion without debt or $US2.89 billion).

Husky shareholders will receive 0.7845 of a Cenovus share plus 0.0651 of a Cenovus share purchase warrant in exchange for each Husky common share, according to the statement.

The two companies are looking for $1.2 billion and will operate as Cenovus Energy with headquarters in Alberta, Canada, Sunday’s statement said.

Cenovus said the combined company will be the third-largest Canadian oil and natural gas producer with production of 750,000 barrels of oil equivalent per day of low-cost oil and natural gas.

That deal came a week after the biggest deal so far – ConocoPhillips’s agreed $US9.7 billion bid for rival US shale oil producer Concho Resources.

The deal swaps 1.46 shares of ConocoPhillips for each Concho share, an about 1.5% premium over its Friday price.

Reuters said Concho had $US3.9 billion in long-term debt at the end of June, and has not posted an annual profit since 2018. Its second quarter loss was $US435 million, more than four times the loss of $US97 million a year earlier.

The combined company will hold about 23 billion barrels of oil equivalent resources with an average cost of supply of below $US30 per barrel of U.S. West Texas Intermediate crude. Conoco said the merged company would be the largest independent producer in the US, producing 1.5 million barrels of oil a day and some gas.

The deal will also see the merged company move into the ranks of the top producers in the Permian Basin,America’s prime fracking oil and gas field stretches from West Texas to southeastern New Mexico.

The next day Pioneer Natural Resources Co said it would buy smaller rival Parsley Energy in a deal valued at about $US4.5 billion.

The all-share deal will create the largest Permian Basin-only focused shale oil producer.

The merged company will pump about 328,000 barrels of oil a day.

Earlier this year Chevron Corp bid $US4.2 billion in paper for Noble Energy, and Devon Energy Corp revealed a $US2.6 billion paper offer for rival WPX Energy.

Glenn Dyer

About Glenn Dyer

Glenn Dyer has been a finance journalist and TV producer for more than 40 years. He has worked at Maxwell Newton Publications, Queensland Newspapers, AAP, The Australian Financial Review, The Nine Network and Crikey.

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