[Editor's note: A version of this story appears in the November 2020 issue of Oil and Gas Investor magazine. Subscribe to the magazine here.]

Industry pundits have predicted—wished for, even—E&P consolidation for years. That time is nigh. Since July, six corporate combos have been announced; three in October alone. Surf’s up, and the merger waves are crashing onshore.

The pain of 2020’s sustained low oil and gas prices has prodded recalcitrant sellers to the bargaining table. Major integrated oil company Chevron Corp. stirred the waters first with its $13 billion absorption of Noble Energy Inc. That created surfable swells for Southwestern Energy Co. to buy Montage Resources Corp. ($865 million), Devon Energy Corp. to pair up with WPX Energy Inc. ($5.7 billion), ConocoPhillips Co. to woo Permian favorite Concho Resources Inc. ($9.7 billion), Pioneer Natural Resources Co. to roll in Parsley Energy Inc. ($7.6 billion) and even a joint run between microcaps Contango Oil & Gas Co. and former MLP Mid-Con Energy Partners.

All the deals were low-to-no premium, all-stock agreements.

Notably, the sellers in these instances were not distressed. Indeed, most were included in the top tier of companies with balance sheets, inventories and management teams positioned to weather the storm surge. What gives?

Scott Hanold, analyst with RBC Capital Markets, in an Oct. 22 report, said surviving is not thriving in this potentially elongated downturn environment, and the sudden industry flurry of public M&A is a proactive effort to create enough scale to enhance shareholder returns.

“We think a driving force for consolidation includes the inability to generate sufficient free cash flow at strip prices on a standalone basis to appease shareholders and pay down debt to more comfortable levels.”

Management teams, he said, aren’t willing to underwrite bullish oil outlooks anymore nor do strip prices allow much incremental cash to return to said shareholders. “We believe the recent macro volatility, lack of shareholder interest and ESG factors have taken a toll on past willingness to tough it out.”

The jury is still out as to whether these combinations will be able to generate the returns needed to attract investor interest, Hanold said.

Leo Mariani, KeyBanc Capital Markets analyst, sees the trend as “very reminiscent” of the merger spree among majors in the late 1990s/ early 2000s. Then, low valuations and investor apathy similarly drove financially driven mergers that focused on cost cutting, he said in an Oct. 22 research note.

“We see the current wave of consolidation very much in the same vein,” he said. However, “The investment backdrop today feels far worse than the late 1990s given ESG concerns that were virtually nonexistent 20 years ago, worries over peak oil demand, potential regulatory headwinds from a [Joe] Biden White House, and a weighting of around 2% in the S&P 500 vs. 6% in the late 1990s.”

Specifically referencing WPX, Concho and Parsley, Mariani noted, “We think these companies capitulated mainly due to a continued dearth of investor interest in energy.”

Noble, he said, agreed to hand over the keys due to high leverage, and Montage’s decision was related to low market cap issues. The company—itself a combination of Eclipse Resources and Blue Ridge Mountain Resources Inc.—had a cap of just $200 million, “which made it largely uninvestable.” The same was likely true for both Contango and Mid-Con and still will be pro forma.

While most analysts see the consolidation wave as a needed shrink-to-grow phase for the industry, Simmons analyst Mark Lear was perplexed and less than pleased with Concho for selling up on the cheap.

“It’s particularly surprising for a company such as Concho with a strong balance sheet and deep inventory runway to be selling in a low premium deal,” he said in an Oct. 19 report, “and we think it would be difficult for Concho shareholders to stomach what could only be viewed as capitulation on or near the lows.

“We viewed Concho as one of the few companies that was positioned to thrive on the other side of this cycle, and it is difficult to see what additional benefit this deal would afford Concho shareholders that couldn’t have been done organically.”

One explanation: He interpreted comments by Concho CEO Tim Leach on the deal announcement call as “a condemnation of the standalone unconventional business model, in that the high base production declines inherent in shale make it increasingly difficult to answer the call by investors for increasing capital return.”

Are we witnessing the beginning of the end for the shale model?

Morgan Stanley analyst Devin McDermott, in an Oct. 21 report, said, “In a backdrop of abundant resource, the long-term energy transition away from fossil fuels and, in effect, little room for shale growth, we have viewed consolidation-led scale as logical—and perhaps even necessary—for companies to compete in the next phase for U.S. energy: ‘more returns, less growth.’

“Consolidation is necessary, and the trend appears to be here to stay.”

The E&P universe is shrinking before our eyes. Catch a wave, dude—it could be a gnarly ride.

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