In January, I mentioned 10 key oil and gas industry themes that I expected to be significant in 2020. Most of us are ready to put 2020 behind us, but let’s take a look back and see how those predictions played out.
- The Industry Has Fundamentally Changed – As expected, the “lease and flip” strategy contributed very little to the A&D market in 2020. Major deals were rationalized by “scaling up” in core areas, and most smaller deals were related to selling non-core assets or otherwise improving balance sheets through liquidation (in and out of bankruptcy).
- Cash Flow Is King — The objective of maintaining production while living within cash flow continues to be desired, but elusive. The market reflected a lot of interest in proved developed producing (PDP) properties in 2020 and less emphasis on undeveloped locations.
- Scale Is Becoming Even More Important — Several large acquisitions were announced, mostly stock-for-stock deals, as public companies strived to get larger and take advantage of the higher price multiples that larger companies currently command.
- ESG Issues Aren’t Going Away — In 2020, we saw more companies make commitments to reduce their CO2 emissions, the creation of an industry group to monitor flaring, and increased interest in carbon capture and storage in 2020.
- An Abundance Of Undeveloped Hydrocarbons Is Diminishing The Importance Of Undeveloped Inventory — Low prices have dampened returns for all but the best plays and have reduced the emphasis on acquiring drilling inventory.
- Consolidation Is Necessary And Is Coming — Consolidation continued in 2020, but perhaps not at the pace needed to achieve required economies of scale. Interestingly, despite limited consolidation and a general reduction in the number of active companies, some start-ups are having success tapping into new sources of capital and are looking to acquire assets.
- Restructurings Are Likely To Be Significant In 2020 — Restructurings, whether in or out of bankruptcy, were highly active in 2020. Although the pace is expected to slow, we expect restructurings to continue in 2021. It will be interesting to watch how the new equity owners will choose to manage the companies they now control. Will there be an uptick in A&D activity as the new owners rationalize their portfolios and seek to get cash out of the business?
- Despite Becoming A Major Exporter, The U.S. Isn’t The Global Swing Producer – This was immediately obvious following the initial pandemic demand shock. With no coordinated way to restrict production to alleviate oversupply, the market was forced to rely on OPEC+ to reduce production and stabilize prices.
- Novel Sources Of Capital Are Being Pursued, But They’re Not For Everyone – We haven’t seen a single structure become the dominant alternative to diminishing traditional capital sources, but multiple approaches are being attempted, such as new debt structures, special purpose vehicles, and SPACs. New investors are seeking to deploy these structures during a period of low prices and widespread financial distress.
- Despite Headwinds, There’s Reason For Optimism — To say it’s been a tough ride in 2020 is an understatement. The year started with depressed prices due to oversupply, but that was quickly overshadowed by the unexpected punch of the COVID pandemic. The dramatic decline in U.S. drilling and the reaction of OPEC+ balanced the market in the $40-45/bbl range, and the almost unimaginably fast development of COVID vaccines, the extension of pandemic relief, and the partial recovery of the economy do give a reason for optimism. Nevertheless, the uncertainty about the impact of new virus strains and the time needed to roll out the vaccines means we’re not out of the woods yet.
Originally published in The Weekly E&P Update Newsletter, December 22, 2020. Republished with permission