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

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

WTI crude futures posted their best annual performance since 2016, rallying 13% in Q4 and nearly 35% in 2019. This increase is a result of reduced inventories, a stronger outlook on demand due to anticipation of Phase 1 of the US-China trade agreement, and the recent escalation in Middle East tensions. Additionally, OPEC cut production at its December meeting, which helped stabilize the price of crude oil in the interim, although the impact of OPEC cuts has been largely offset by continued increases in US shale production.


Increase in WTI Crude Futures in Q4


Increase in WTI Crude Futures in 2019

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.

Q4 2019 Metrics

$62.34 - $50.99 WTI Range

as compared to 2018 with $76.90 – $42.36

$2.91 - $2.14 Natural Gas Range

as compared to 2018 with $4.93 – $2.93

2019 vs. 2018 Rig Count

Oil: 677 vs 885 | Gas: 125 vs 198 | Total: 802 vs 1,083

Oil and Gas M&A Deals


Saudi Aramco pulled off the biggest IPO in history, raising $25.6 billion by selling 1.5% of the company.

  • 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.

Reorganization Efforts

  • The pace of restructuring activity picked up in Q4, a trend that is expected to continue in 2020. Switzerland and Houston-based oilfield service company Weatherford International has emerged from Chapter 11 bankruptcy with roughly $10 billion of financial support. Weatherford announced that the company emerged from Chapter 11 with $6.2 billion of outstanding funded debt, secured $2.6 billion in exit financing facilities, including a $450 million revolving credit facility, secured a $195 million letter of credit facility, and emerged with over $900 million of liquidity.
  • Reports state that McDermott is preparing to file for Chapter 11 over the next few weeks and that a group of lenders led by the New York investment firm HPS Investment Partners and Boston hedge fund operator Baupost Group are in talks to provide the struggling Houston company with a loan of around $2 billion to maintain operations during bankruptcy.
  • Chesapeake Energy, which helped propel the shale gas revolution in the late 2000s, is now facing tough times trying to heal its balance sheet, on which $9.7 billion in total debt weighs. The company is looking to improve its balance sheet and is evaluating multiple options to reduce debt and to become free cash flow positive next year.
  • Fort Worth, Texas-based Approach Resources said it will explore a restructuring of its balance sheet, a going-concern sale of its business and other alternatives while under Chapter 11 protection. The company has drilling operations in West Texas, having operated oil and gas properties in the Permian Basin since 2004.
  • Banks are expected to continue cutting their exposure to struggling US shale drillers and are restricting lending as they revise their estimates on the value of shale reserves. Haynes & Boone estimates that banks could cut their credit lines to the sector by an average of 10 percent, with much more significant reductions for companies that are in a weaker financial position. The scrambling among financial institutions comes as the industry is being hit by a wave of write downs by the super majors, which has implications for the entire sector.

Riveron brings energy companies an uncommon agility, applying extensive technical accounting, finance, and operations expertise to accelerate the timeline and impact of change. Our experienced team members have sat on all sides of the table from executive roles in accounting and operations to investor roles in private equity and investment banks. We understand the unique challenges facing the energy industry and partner with our clients to achieve exceptional results.

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