HOUSTON – Many upstream oil and gas buyers are “in hibernation” as strategic mergers and acquisitions remain in a holding pattern, one of the nation’s top deal advisers said.
“Most of them are digesting what they bought, and they also are feeling a lot of pressure on the part of investors to return capital and exhibit capital discipline,” said Ralph Eads III, global head of energy investment banking at New York-based Jefferies Group Inc.
“So there’s more pressure on the public companies to improve returns than there is to grow,” he told a luncheon meeting of the Petroleum Club on Sept. 17. “That’s a new dynamic in our industry and it hasn’t existed in a long time.”
Eads said the industry is struggling with the question of how to go about drilling more wells.
“If you go and buy a company there are the costs of keeping the people and retaining them and being able to say, ‘OK, post this acquisition.’ Can I go drill more wells? The answer is no,” he said.
Eads, who formerly served as executive vice president of El Paso Corp, said that with some exceptions, most companies are satisfied with their current portfolios.
“The problem with it is that when they look at the existing portfolios they have, they assign no costs to the acreage,” he said. “The companies are looking at the return they can make for drilling a marginal well.
“Whereas if I go buy a company or buy a field, I’ve got to pay the upfront costs of buying the assets,” Eads said. The question arises, “Have the well economics been good enough to be better than my sunk-cost well over here?”
What’s more, Eads said, the oil and gas industry is witnessing unprecedented regime change at the top.
“If you look at the 40 largest companies in North America, 50 percent have either had CEO change or will have CEO change in a 12-month period,” he said.
Many companies did not execute well in the transition to shale oil, according to Eads.
“They bought bad assets or they didn’t do anything. Companies that didn’t act now find themselves with portfolios that don’t work and are not competitive.”
A big challenge, Eads said, is for companies with plentiful acreage to grow wells on a cost-competitive basis.