Oil and Gas Investor A&D Trends: Fools, Liars, Charlatans

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[Editor's note: A version of this story appears in the January 2021 issue of Oil and Gas Investor magazine. Subscribe to the magazine here.]

The last of the depth charges have slipped into the sea of 2020, exploded and left the oil and gas industry shuddering, knee deep in black water, listening to metal groan.

No, the oil and gas industry has not been sunk. But the year did damage that will take time to assess before deeming it as salvageable or a wreck.

The deal market was, if anything, better than could have been expected. During the past 12 months, upstream oil and gas deals managed about $55 billion worth of value, but over the entire industry, still fell sharply by 41%, according to a Dec. 10 report by PwC.

Oil and gas transaction values only remained afloat because of second half mega deals, which made up $47 billion, or about 85%, of upstream deal tallies. And, of course, those deals consisted mostly of low-premium, all-stock consolidation in oily plays (meaning the Permian Basin).

And, so, we arrive at 2021’s doorstep, blinking, slightly dazed and generally unhappy.

If last year’s movie tagline was something like, “in 2020, no one can hear you scream,” this year’s may well be more Hitchcockian. “Check in. Unpack. Relax. Take a Shower.”

As the famed seismologist Charles Richter once quipped, only fools, liars and charlatanscan predict earthquakes. Assuming it gets better from here may be a mistake. Or not. Expectations in general seem to get everyone into trouble.

PwC sees the deal outlook improving as the industry recovers, though with a hard lean into sustainability measures. With commodity demand still suffering from COVID-19, capital discipline will continue to be the force majeure for the industry.” Capital priorities, overcapacity and profitability concerns will likely drive 2021 deal decisions,” the firm said.

Oil producers, with a glut so disproportionate it has love handles, will likely look to cut loose underperforming assets. Domestic and global natural gas demand appears to be improving, PwC said, suggesting that gas-targeted assets and strategic deals are “also likely set to grow.”

However, PwC also sees competing priorities. The industry will be shifting toward lower hydrocarbons while rebalancing strategy and operations—demands that have to be balanced while engaging in M&A.

The presidential election’s consequences are still unfolding, as well.

“Uncertainty persists across the oil and gas sector, and policy changes under a new U.S. administration’s focus on energy transition could motivate further shifts in deals toward divestments of hydrocarbon assets and infrastructure buildouts to support renewables (including hydrogen), though finding buyers may prove challenging,” PwC’s report said.

Room for optimism? Sure, if you like. The COVID-19 vaccine began circulating in the U.K. in December. IEA reported in November that the lingering impacts of COVID-19 are likely to reduce demand by about 700,000 bbl/d in first-quarter 2021. However, improved expectations in China and India have prompted IEA to raise demand estimates.

In the year, demand will settle in about 3MMbbl/d below 2019 levels, IEA estimated. It’s still too early to say how and when vaccines will allow normal life to resume, the agency said.

Now for some pessimism. The U.S. economy is in tatters, the nation divided and, according to Feeding America, more people are worried about where they will get their next meal after significant gains in the past 20 years. Even before the pandemic, more than 35 million people were “food insecure.” The organization now estimates about 50 million people may experience food insecurity because of COVID-19. That includes 17 million children, or more than one out of every five.

Food insecure, incidentally, means hunger because of a lack of money or other resources.

Add to this that, whatever the outcome of Senate runoffs, Republicans and Democrats are singularly bad at compromise, especially when it counts. At this moment, it’s a coin toss as to who politicians say won the presidency, math be damned. While months have so far gone by without any new relief measures from Congress, that impasse is as likely as not to stretch into more months.

“Usually one gets what one expects, but very rarely in the way one expected it,” Richter said.

Richter was, unexpectedly, kind of a quote machine. Reflecting on roses, he once noted that they cannot bloom without thorns. But it was a pity, he thought, “that the thorns …outlive the rose.”

On the calendar, at least, the Year of the Mask may be over. It may well be that roses are ahead. Or just as likely that we’re in fora year of pricks.