What are the top upstream oil and gas trends to look out for in 2020?
Although recent events in the Middle East are still volatile, it seems the oil price rally is over for now. Prices are more or less back to where they were, but with tensions higher now than in recent years, it probably wouldn't take much to cause another price spike. This week, I'll make a couple of quick comments about a few upstream oil and gas trends I think will be significant in 2020.
- Mergers — The textbook response to low commodity prices and low-capital inflows is to combine companies in order to reduce costs and focus on core assets. That was the expectation in 2019, but the few big deals that occurred left investors underwhelmed and didn't spark a wave of consolidations. Combinations of private equity sponsored companies also made sense in 2019, but inter-fund and inter-sponsor deals have remained elusive. I think we'll see more private consolidations in 2020 and I wouldn't be surprised to see a big public deal. But, I still don't see a wave of consolidations in the early part of this year.
- A&D — As long as capital inflows remain anemic, I don't expect the A&D market to noticeably improve. However, given the superior trading multiples of the majors and their positive cash flow, I expect they will continue to make selective bolt-on acquisitions. Some sellers who failed to get the bids they wanted on 2019 will need to sell, even if bids aren't what they're hoping for. For some, time is short and the reality of the current market is setting in.
- Capital Discipline — Investors will continue to favor firms with strong financial discipline and free cash flow generation. The appetite for lower risk, free cash flowing assets will continue to drive interest in PDP-heavy assets. Restructurings are likely to continue as base production declines take a toll on companies lacking good drilling economics or liquidity to pursue them.
- Minerals — I expect interest in minerals to remain high, and I wouldn't be surprised to see more S-1 filings to test the IPO market.
This article was published in the January 14, 2020 issue of the RED Weekly E&P Update Newsletter.
