[Editor's note: A version of this story appears in the January 2019 edition of Oil and Gas Investor. Subscribe to the magazine here.]

Welcome to 2019. Please keep a defibrillator charged and within reach.

Last year, the industry seemed to gingerly try the recovery on. Optimism returned despite an unhealthy diet of trade wars, oil price volatility and a tantrum-prone public market.

But an underlying arrhythmia has developed as international politics continue to take an outsized role in the price of a barrel of oil and the broader economy.

Upstream deal flow appeared to be just fine in 2018 as transaction values skyrocketed. But large, stock-heavy transactions obscured the infrequent asset sales, creating the highest values—yet lowest number of deals—since 2011—according to a November report by EnerCom Inc.

Investors, generally speaking, despised both kinds of deals.

First-quarter 2018 bankruptcies mirrored the transactions in first-quarter 2018. The number of bankruptcies fell from previous years, but debt was substantial. “The amount "almost equals the debt administered by filings during the entirety of 2017,” Haynes and Boone LLP reported in March.

RELATED: Energy Bankruptcies Slow, But Debt Remains High

Despite higher commodity prices in mid-2018, companies faltered. Eagle Ford-focused Sanchez Energy Corp. (NYSE: SN) appeared in real peril in December 2018.

Analysts don’t usually write obituaries, but Capital One Securities Inc.’s Nov. 20 report on Sanchez came close. “Death spiral likely continues as Sanchez appears insolvent,” the report began.

Sanchez’s woes may serve to reinforce a cautionary tale: Rich deals don’t necessarily equate to lucrative results. For much of 2018, Sanchez was on the defensive due to well-spacing and other challenges in its Comanche-area assets. In March 2017, Sanchez and partner Blackstone Energy Partners LP purchased the position from Anadarko Petroleum Corp. (NYSE: APC) for some $2.3 billion.

In August 2018, Sanchez brought on a consultant to enhance its production and operating margins. On Dec. 4, with $550 million in liquidity, the company hired Moelis & Co. LLC to “explore strategic alternatives.”

Weakness in the 2018 asset market complicated matters. For months, Sanchez marketed its Maverick position (among others). Analysts estimate Maverick is worth about $500 million. Despite generating interested parties and producing 347,000 barrels (bbl) of oil in the third quarter on little capex, the asset hasn’t moved.

Erratic oil prices only served to justify the concerns of investors that turned away from oil and gas during the downturn. In October, the prompt-month CME contract for WTI was more than $70/bbl. In November, the prompt-month contract dropped to $50/bbl, according to EIA data.

By Thanksgiving, with the industry flailing, U.S. producers already haunted by November 2014 found themselves again watching Vienna, where OPEC would convene. However, a particularly powerful spoiler was at work: President Donald Trump. S&P Global Platts tracked the prompt for Brent on CME and ICE and the president’s related tweets—10 in all—from April through December.

In each, Trump aimed to keep oil prices low, likening them, in one case, to a tax cut.

“So great that oil prices are falling—thank you President T,” @realDonaldTrump tweeted on Nov. 25. On Dec. 5, the president added, “Hopefully OPEC will be keeping oil flows as is, not restricted.”

Despite pressure from Trump, OPEC, Russia and, a week earlier, Canada (yes, Canada) ultimately combined to curtail daily production by 1.5 million bbl. On Dec. 7, U.S. inventories continued to fall, with a draw triple the 2 million-bbl estimate by Tudor, Pickering, Holt & Co. (TPH).

“While we try to focus on fundamental and structural trends, it is undeniable that politics play a large role in the global market,” TPH analysts reported. “The past few months have punctuated this fact.

“Whether it be government-mandated curtailments—Canada—an overt consolidation of power/influence—Saudi and Russia—or sweeping economic sanctions—U.S. and Iran—geopolitical relationships have a stranglehold on the current market.”

Greater volatility should be expected.

“However, economics over the medium term will still rule the day as the majority of global growth resides in the hands of U.S. producers, who are beholden to their shareholders rather than a government entity.”

But the economy is more politicized, Julian Emanuel, chief equity and derivatives strategist at BTIG LLC, told The New York Times. “The fact is that politics is driving the economy to an extent that is very atypical,” he said. “We would say probably to the greatest extent that we’ve seen in our investing lifetime.”

And so 2019 begins much as last year did: with uncertainty—the great deal-killer—lurking ahead.

Darren Barbee can be reached at dbarbee@hartenergy.com.

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