Q4 2019 Oil and Gas Industry Update: What You Need to Know

US energy policy will enter uncharted waters with the upcoming 2020 election. It is not yet clear if any one candidate has the viable solutions needed to address the breadth and complexity of the challenges ahead. While these issues remain unresolved, the industry can expect that the politics around US production of all fuels, permitting processes, the evolving US energy mix, export, and trade policy will continue to create uncertainty.

Commodity Prices

After falling from a high in mid-September of $63.38 to a low of $50.99 in early October, the price of WTI crude made for higher highs and lower lows. A weaker US dollar and lower US interest rates are bullish for the price of crude oil and increased tension in the Middle East has the potential to cause a significant move in the crude oil market in Q1. Alternatively, as investors continue to place unprecedented pressure on producers living within free cash flow and exercising capital discipline, a less volatile energy industry could also materialize, creating a more attractive landscape for future investors.

In the natural gas market, the memories of when futures rose to $4.93 per MMBtu in November 2018 have faded into the market’s rear-view mirror. Despite the start of the winter season, natural gas futures posted a loss of 6.05% in Q4 and are 25.54% lower than in 2019. The pre-winter rally was brief with the nearby futures contract rising to a high of $2.91 while heavy selling took the price below the $2.20 level in December.

For production, the progress has been clear. The powerful combination of faster and cheaper drilling and completion techniques has helped grow output even as the rig count has continued to fall. Depending on the play, several shale companies are claiming breakeven points when oil prices are in the $40 range, or when gas prices sit below $2.30. Ongoing innovation in shale production may be the most underestimated reality driving the energy landscape in 2020.

• While energy capital markets remain closed in the United States and the acquisition and divestiture market continues to be challenged, several transactions were completed in Q4. The giant state-owned oil monopoly, Saudi Aramco, pulled off the biggest IPO in history, raising $25.6 billion by selling 1.5% of the company, creating an implied enterprise valuation of $1.7 trillion. Its shares have slumped to their lowest level, from $38.00 per share shortly after the IPO date to $35.25 as of December 31, 2019.
• Two Houston-based oilfield companies, C&J Energy Services and Keane Group, have completed their merger and will now be named NexTier Oilfield Solutions. The deal is expected to create a diversified oil field services provider valued at approximately $1.8 billion, including $255 million of net debt. The shareholders of each company will own 50% of the equity in the combined company and the companies expect to achieve $100 million in cost synergies within 12 months.
• Apergy Corp. agreed to combine with Ecolab Inc.’s upstream business in a transaction valued at $4.4 billion, including the assumption of debt. The merger combines Apergy with Ecolab’s Nalco Champion business, which was renamed ChampionX and consists of drilling, completion, and energy production, chemistry sciences and solutions operations. The combined business is expected to generate pro forma revenue of about $3.5 billion with annual run-rate cost synergies of $75 million.
• WPX Energy is taking another significant step in its commitment to delivering shareholder value with the $2.5 billion purchase of Felix Energy, one of the highest quality Delaware Basin operators. Felix has approximately 1,500 gross undeveloped locations in the eastern portion of the basin, with expected production of approximately 60 MBoe/d (70% oil) at the time of anticipated closing.
• Stockholders of the Oklahoma pipeline company SemGroup voted to approve a $5 billion merger with Dallas-based pipeline giant Energy Transfer. The deal is expected to expand Energy Transfer’s crude oil and natural gas liquids pipeline capacity by adding assets in the DJ Basin in Colorado and the Anadarko Basin in Oklahoma and Kansas.
• Parsley Energy and Jagged Peak Energy announced they have entered into a definitive merger agreement under which Parsley will acquire Jagged Peak in an all-stock transaction valued at approximately $2.27 billion that is expected to close in the first quarter of 2020. Parsley, which has a strong presence in the Permian’s more mature Midland Basin, will expand greatly in the Permian’s booming Delaware Basin with this acquisition.
• Devon Energy Corp. announced it has entered into a definitive agreement to sell its assets in the Barnett Shale to Banpu Kalnin Ventures (BKV) for $770 million. This transaction is subject to customary terms and conditions and is expected to close in the second quarter of 2020. Devon expects no incremental cash taxes associated with the divestiture of these assets.
• The Permian continues to be a key driver of growth and a significant contributor to M&A accounting for more than 60% of Q4 2019 transaction value. From a buyer’s perspective, there are opportunities to shop for private equity portfolio companies that are ready for an exit or acquire companies that have not fared well on Wall Street. Tight capital-raising options for potential sellers is a contributing factor for an M&A uptick in 2020. After a year of cutting costs and focusing on efficiencies, larger companies look ready to turn the corner on free cash flow and are instituting dividends and share buybacks to satisfy investors.