Deals values have crumbled and activity has gone into hibernation in 2015, but a Goldman Sachs analyst says oil majors could move on prime E&Ps such as EOG Resources Inc. (EOG) to finally get their footing in U.S. shale.
Ruth Brooker, analyst, Goldman Sachs, said the A-list shale companies are targets for the next stage in the market’s evolution due to their strong positions, low breakeven points and high quality resource life.
“We see 10-15 million barrels per day (bbl/d) of production which can be transferred through M&A” to oil majors, Brooker said in a report. “M&A in the New Oil Order.”
Major oil and gas companies are underexposed to U.S. shale oil, with about 5% of the resources. The majors have also struggled to replace their reserves.
“We expect to see further consolidation within the U.S. shale plays given the majors’ underexposure to this material and improving win-zone,” Brooker said.
Global majors practically have money to burn—about $150 billion in spending power—and could defer up to $325 billion in capex on marginal projects, she said.
Brooker’s best in class list are heavy hitters:
- EOG Resources;
- Pioneer Natural Resources Co. (PXD);
- Continental Resources Inc. (CLR);
- Cabot Oil & Gas Corp. (COG);
- Noble Energy Inc. (NBL);
- Anadarko Petroleum Corp. (APC); and
- Range Resources Corp. (RRC).
The companies, based on Brooker’s estimates, could be collectively acquired for $195 billion at their current enterprise value.Brooker said the list was created by screening companies for key attributes for M&A targets such as U.S. shale exposure, asset quality, cost curve positioning, materiality and upside potential in an M&A scenario.
“We believe these [companies] offer the majors material portfolios of strategic, high quality assets sitting low on the cost curve,” Brooker said.
In the second quarter of 2015, global oil company M&A activity fell to the lowest number of deals since the fourth quarter of 2008. And transactions value was pumped up significantly by the merger of Royal Dutch Shell Plc (RDS.A) and BG Group Plc in April, the U.S. Energy Information Administration (EIA) said.
“Without the Shell-BG merger the value of deals in the second quarter of 2015 would have totaled $31 billion,” the EIA said.
In a weakened market, shale is still flaunting its muscle, with breakevens at $60 per bbl.
Deals within shale areas are also likely to include consolidation among E&Ps.
“We believe there is still interest by multiple large and mid-size producers in expanding positions in key shale plays or entering shale plays,” Brooker said. “Multiple shale plays have very fragmented ownership, particularly the Permian Basin, Marcellus Shale, Utica Shale and D-J Basin [Wattenberg/Niobrara play].”
So far in 2015, two “meaningful acquisitions” by E&Ps have been announced: Noble Energy Inc. (NBL) purchased Rosetta Resources Inc. for $3.9 billion. And WPX Energy Inc. (WPX) has said it will merge with RKI Exploration & Production LLC in the Permian for $2.75 billion.
And while Brooker said her top picks offer high quality portfolios, they aren’t the only companies that could command attention.
Purely on an M&A upside basis, without considering asset quality and materiality, the stocks with greatest upside include Eclipse Resources Corp. (ECR), Ultra Petroleum Corp. (UPL) and Whiting Petroleum Corp. (WLL).
E&Ps with high asset quality but feeble balance sheets could also be M&A targets by cash-rich majors. They include Continental, Lundin Petroleum AB, Memorial Resources Development (MRD), Det Norske, Tullow Oil Plc and Range Resources, Brooker said.
Contact the author, Darren Barbee, at email@example.com.