For yet another month, OPEC revised its expectations for global oil demand as the renewed spike in coronavirus cases in major economies is slowing down demand recovery. The group now sees global oil demand at slightly above 90.0 million barrels per day this year, down by 9.8 million bpd compared to 2019. As a result, talks between OPEC and its allies are zeroing in on a delay to next year’s planned oil-output increase of three to six months, according to several delegates as they think twice about easing cuts in January.
Energy Sector Woes
The energy sector has emerged as the worst-performing of the United States eleven market sectors in the current year, dropping to its lowest point relative to the S&P 500 since 1931. In fact, not only is the oil and gas industry the biggest market loser of 2020, but it has also now become the worst performer on the market ever. Over the past 20 years, the S&P 500 has risen more than 130% while the XLE energy ETF has fallen 3%. Things need to start changing quickly if there is any hope for the energy sector.
Some Will Win, Some Will Lose
In a spooky week in oil, Third Quarter results were released for some of the worlds largest and most powerful oil and gas companies and there were some surprising results. Low prices, reduced production, and slashed operating costs forced companies like ExxonMobil and Chevron to report massive losses while others like Shell and BP surprised investors and the world by turning a profit during a tumultuous third quarter.
Consolidation Is Key
This week, two major U.S. shale acquisitions were officially announced when ConocoPhillips announced their acquisition of Concho Resources and Pioneer Natural Resources announced their agreement to acquire Parsley Energy. The Pioneer all-stock transaction valued at $4.5 Billion (inclusive of Parsley’s debt increases the value to $7.6 Billion) is significantly less than the all-stock transaction of the ConocoPhillips deal valued at $9.7 Billion (inclusive of Concho’s debt increases the value to $13.3 Billion) but is significant nonetheless. Major moves in the U.S. oil and gas sector indicate that consolidation is the future.
E&P Mergers and Acquisitions – A Case Study
The process of bringing two companies under a single roof can send an organization to new heights but also has the potential for rocky transitions. In the oil and gas industry, E&P mergers or acquisitions tend to strengthen physical positioning and induce an expanded asset portfolio but it often comes with extra baggage in the form of outstanding debt. Such was the case when Occidental Petroleum acquired Anadarko Petroleum as the outstanding debt left the oil major struggling to keep their head above water. By investigating the acquisition process as a case study, analysis can be made regarding Chevron’s new acquisition of Noble and whether or not the merger can be considered a success.