The oil and gas exploration and production industry needs consolidation as volatile commodity prices mean there will be a need for fewer and larger entities to compete for more limited growth, analysts at Evercore ISI wrote in a note to clients.“This is an industry in need of a consolidator and the opportunity to roll up much of the tier 1.5 / tier 2 onshore will be here for the taking,” wrote analysts led by Stephen Richardson, though it is “unclear who will step up to the plate.” Public E&P companies of scale should “be leaving no stone unturned” in an attempt to get their hands on cash, Evercore ISI said.While the market remains more skeptical about the sustainability of commodity prices over the longer term, the analysts argued that the “lower for longer” view will likely be what keeps the window for deals at attractive values open. WTI crude has clawed back toward $40 a barrel this month, though it plunged more than 8% in New York trading on Thursday.
The downshift in long-term price expectations has “widened the gap between the Haves and the Have-Nots,” the analysts wrote. Companies that are unable to self-fund operations and turn a profit with oil in the $40 a barrel range will be “challenged to win support in public markets.”
Evercore ISI highlighted XTO Energy Inc., Apache Corp., and Canadian Natural Resources Ltd. as case studies for success in building large producers of oil and gas. The trio of companies represent firms that executed on the “acquire + exploit” model, which Evercore ISI argued is still relevant.
“Our point is merely that a window of opportunity is opening for those willing to build scale in the upstream,” the analysts wrote. “After the past decade of dismal performance, a strategy shift may be in order.”
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