The Fuse

Will Chevron’s Anadarko Acquisition Spark a Shale Consolidation Wave?

by Alex Adams | @alexjhadams | April 16, 2019

Last week, Chevron agreed to purchase all outstanding shares of Anadarko in a $33 billion cash-and-stock deal. According to Wood Mackenzie, this would now place Chevron in “the ranks of the ultramajors.” Aside from turning Chevron into the second-largest publicly traded oil and gas producer—behind ExxonMobil—the deal has many investors hoping it will spark consolidation in shale oil sector.

Although the larger producers have performed well by maintaining capital discipline, many of the smaller producers are struggling as their well development projections have fallen short of the optimistic projections they made to investors. The “parent-child” well problem, in which new shale wells interfere with the output of older wells, has caused some industry executives, such as Schlumberger’s Paal Kibsgaard, to conclude, “This suggests that the Permian growth potential could be lower than earlier expected.”

“This suggests that the Permian growth potential could be lower than earlier expected”

Many investors have been calling for producers to reduce their freewheeling capital spending since 2017, and they believe the need for consolidation has grown more acute in 2019. As Rystad Energy observed in late 2018, the market remains unconvinced a typical shale producer “is able to grow in a self-sourced manner as more than 75 percent of dedicated U.S. shale oil companies keep reporting capex figures in excess of cash flow from operating activities.” A February 2019 research note from J.P. Morgan added that investors are skeptical producers can meet their capex budgets, “as the 2019 guides generally imply meaningful declines from 2018 actuals.”

As a result, the industry has been speculating on whether the Chevron acquisition of Anadarko represents the start of a long-awaited wave of consolidation in the U.S. oil patch. The expectation among industry watchers is that the bigger companies will begin to take over the smaller producers, who cumulative produce a large amount of oil but without generating any operating profit. Following the Chevron announcement, The Wall Street Journal reported on Friday that shares of major shale producers including Pioneer Natural Resources, Concho Resources and Parsley Energy jumped 8 percent on hopes that the round of consolidation will soon begin.

“The game is on to acquire these companies”

“The game is on to acquire these companies,” Rystad Energy CEO Jarand Rystad also told the Journal, adding that smaller companies with high-quality acreage in the Permian are an increasingly attractive prospect to majors looking to expand their U.S. shale portfolio.

The eagerness for consolidations is also driven in part by an expectation among some that oil consumption could peak by the end of the next decade, since many governments are trying to curb fossil fuel use. In response, company executives at these smaller producers have been advised by investors to rein in their spending—and those who have not listened have been taught a lesson, according to analysts.

Given the oil industry’s capital-intensive nature, and the difficulty of smaller producers to profit from operations, investors are hopeful that the long-anticipated wave of consolidations will be sparked by the Chevron-Anadarko deal.