2021 was always going to bring significant change to the oil and gas sector, so the fact that mergers and acquisition activity is up should be little surprise. The fact that bankruptcies are down is a welcome attrition to the story. Before we get too far into the champagne, it is important to remember that we are still a long way from the new normal, suggests Kay Rieck, an experienced market observer and investor.
The oil and gas sector has faced unprecedented challenges over the last 18 months, which has led inexorably to a high level of merger and acquisition among US oil and gas operators in 2021. According to a recent report by S&P Global Platts Analytics [LINK], M&A activity has reached US$53.9 billion so far this year, just topping the seven-year-high recorded in 2014 when activity totalled US$53.5 billion. Given the fact that there’s still another month to go and the exceeding complication position the oil and gas sector finds itself in as 2022 looms on the horizon, it wouldn’t be surprising if there was further activity that becomes finalized over the next few weeks.
According to the S&P report, activity in the Permian Basin accounts for 60% of the mergers, but Hayesville has been the second most active region, reporting US$6.75 billion of mergers, representing 13% of all deals so far in 2021. The reason for the attention on Hayesville is that it has good access to LNG feedgas, exports to Mexico, industrial and gas-fired generation, all of which are witnessing strong growth in demand.
The bust already happened
At the same time as M&A activity has been high, there have also been relatively few company failures in the US oil and gas sector. Bankruptcies during the first half of 2021 among upstream operators in North America have been at their lowest level since at least 2015, according to law firm Haynes and Boone. Only 12 producers filed for bankruptcy during Q1 and Q2, the lowest number since 2015, when 13 companies filed.
This was only a snapshot from a few months ago, but there are two reasons why the trend in the second half of the year is unlikely to be significantly different. Primarily, the high price of oil and gas makes means that despite the dark clouds and complications surrounding the industry, cash flow is likely to be positive for a few months yet.
At the same time, the abominable situation in 2020, when demand and prices collapsed, is likely to have accelerated the failure of any organizations that were teetering on the brink. This means that there will have been fewer ailing companies that struggled through into 2021.
While these related news items seem to suggest that the oil and gas sector is in a relatively healthy place at this point, it is important that any celebrations come with a healthy dose of realism. The sector has faced a succession of uniquely challenging short-term hurdles since Covid-19 made its presence felt, and while the economic recovery has been better than many hoped, demand is still erratic and conditions very challenging.
When it started to become clear that Covid-19 was going to lead to a pandemic, numerous people started talking about how we were going to have to accept a new normal. Eighteen months on and it’s probably fair to say that we are still waiting for it to arrive.
About the author
Kay Rieck has been active on the investment side of the oil and gas sector for more than two decades. Starting his career as a financial adviser and stockbroker on the New York Stock Exchange, he quickly developed an interest in natural resources and associated assets, building his expertise with investment banking and asset management roles at the New York Board of Trade and the Chicago Board of Trade. Utilizing his exceptional network of global contacts, he started his first exploration and production company in the US in 2008, selecting investments across the Hayesville Shale, Permian basin, Eagle Ford shale, Dimmit county and elsewhere that offered exceptional prospective returns.
