Last week, I moderated a panel ("M&A Outlook: Consolidations, Acquisitions and Divestitures") at the IPAA Private Capital Conference at the JW Marriott in Houston, TX. The attendance was quite good and a number of additional seats had to be set up at the back of the ballroom to accommodate all the attendees. The mood at the conference was somber, but resolute. A number of themes were mentioned repeatedly, and I think it's safe to say they represent something of an industry consensus on the state of the industry and how it needs to move forward.

1. The Industry Has Fundamentally Changed – The days of "lease and flip" are over. Management teams (public and private) will be judged on their ability to deliver returns, demonstrate capital discipline and operate a business over several years.
2. Cash Flow Is King – With the capital gains model in retreat, investors will look to companies that can generate strong equity returns and reward investors with dividends.
3. Scale Is Becoming Even More Important – Investors prize the strong balance sheets and free cash flow generation that typically accompany larger firms. Low-cost of capital is again becoming an important competitive advantage.
4. ESG Issues Are Not Going Away – More and more investors are demanding increased accountability regarding ESG issues; many companies are responding accordingly in their business models, operational practices and disclosures.
5. An Abundance Of Undeveloped Hydrocarbons Is Diminishing The Importance Of Undeveloped Inventory – Investors are more concerned about companies' current margins and returns than whether they have decades of drilling inventory.
6. Consolidation Is Necessary And Is Coming – The industry was overcapitalized and many companies are not delivering what investors want. To gain scale, reduce costs and focus on core assets, a significant amount of consolidation needs to occur.
7. Restructurings Are Likely To Be Significant In 2020 – Poor geology, unfavorable pricing and limited capital will make it impossible for some companies to grow their business and meet their debt obligations. With an anemic M&A market, there will be limited opportunities for companies to sell their assets, so debt restructurings are expected to rise.
8. Despite Becoming A Major Exporter, The U.S. Isn't The Global Swing Producer – U.S. oil output is expected to continue to grow to a maximum of around 14 million barrels per day (MMbbl/d), but Saudi Arabia, Russia and some non-state actors will adjust supply to balance the market.
9. Novel Sources Of Capital Are Being Pursued, But They're Not For Everyone – Asset-backed securities and foreign exchange listings are options, but deal flow has been muted and transactions are more difficult.
10. Despite Headwinds, There's Reason For Optimism – The oil and gas industry has some of the smartest, hardest-working and most resourceful business people in the world. They have risen to great challenges before and I sense greater determination to begin to resolve the industry's problems in 2020. There seems to be a stronger awareness of the realities facing the industry and people seem ready to move forward.

Originally published in the Red Weekly E&P Weekly Update Newsletter, January 28,2020