By Barbara Kollmeyer, MarketWatch
Twin blows from price wars and a demand-crushing deadly virus could usher a new era of consolidation in the oil industry, some 20 years after the last big wave of mergers, say some observers.
“I would be gobsmacked if 18 months from now we didn’t have fewer names in the space as a whole. I don’t think that’s really a surprise,” James Gutman, Dolfin’s head of investment portfolios, told MarketWatch.
“Oil-related equities have fallen twice as far as the rest the market since the beginning of the year. It’s been a horror show for the market, but it’s been even worse for the oil patch,” Gutman said.
U.S. and Brent crude were hovering at or under $20 on Monday, with prices down just over 50% so far this year. The Russia-Saudi Arabia oil-price war kicked off the pain for oil prices in early March, followed by a demand shock as global economies shut down from the coronavirus.
“I would be gobsmacked if 18 months from now we didn’t have fewer names in the space as a whole.”
James Gutman, Dolfin
“We’re probably looking at a surplus of 10 to 12 million barrels [of oil] a day which is larger than anything we’ve seen in memory,” Gutman said, adding that the industry is still struggling to figure out how bad it will get.
In short, all of the above presents a major headache for oil companies trying to maintain dividends, or in some cases just keep going.
Royal Dutch Shell /zigman2/quotes/205095589/composite RDS.A -0.66% , whose shares have dropped 45% so far this year, is among those that have announced cost trimming, though big oil companies aren’t talking dividend cuts yet. There is a long list of highly leveraged energy companies, notably in the U.S. shale patch, that are in for a struggle if the dual crisis drags on.
Danilo Onorino, portfolio manager at Dogma Capital for the Dogma Energy and Materials Fund, told MarketWatch that he sees similarities between the current crisis and 1998 to 1999, when oil prices fell under $10, and some called for $5 a barrel.
“That was the bottom, but the effect of the price drop toward $10 a barrel was the starting point for megamergers across the sector,” he told MarketWatch. Among those, TotalFina and Elf Aquitaine formed Total , BP Arco and Amoco created BP /zigman2/quotes/207305210/composite BP -0.55% /zigman2/quotes/202286639/delayed UK:BP +1.26% and Exxon and Mobil joined up /zigman2/quotes/204455864/composite XOM -0.64% , noted Onorino.
“The logic is that you put together the assets and pick and choose what is good for you and you sell the others. Plus, because you are now one company you can easily save on your operating costs,” he said.
“The most obvious mergers in Europe are BP with Shell, Total with Eni /zigman2/quotes/209584888/delayed IT:ENI +0.59% and Repsol /zigman2/quotes/202941606/delayed ES:REP -0.40% /zigman2/quotes/201138486/delayed XE:REP +0.22% with Galp /zigman2/quotes/206136034/delayed PT:GALP +1.68% in Portugal,” Onorino said, adding that a Shell/BP merger, which has actually been on the table for years, would bring lots of cost synergies.
While consolidation among the majors is possible, Dolfin’s Gutman said they are better placed to weather storms, and more likely would be hunting for opportunities among smaller companies, such as the shale patch, where “the distress signal are urgent right now.”
Greig Aitken, director of M&A research at Wood Mackenzie, said deal-making in the short term is less likely because“companies are “focused on survival” for now, and many are using cuts in capital expenditure and investment to stay afloat.
But if oil prices persist at these levels, “people will rightly start talking about them because ultimately, the industry would have to consolidate to survive,” he said.