For weeks, Russia and Saudi Arabia were in all-out competition for market share, driving crude prices down. Currently, OPEC+ nations are coming to a resolution to reduce output of global production by 9.7 million barrels per day in May 2020 with staggered reduction into 2022. The deal only puts a dent in the issues facing the industry and has obstacles to implementation.
While supply shocks and their impact on prices are not new, the combination of the supply surge with a demand destruction, due to the current economic slump, is truly novel and unprecedented. This has delivered crippling blows to O&G companies across the globe.
In the short term, we believe O&G leaders shouldn’t lose sight of the significant value opportunities in upstream North America consolidation and other transactions made possible by the current supply-demand shock. And time is of the essence.
Unique times present unique opportunities
Challenging times can lead to opportunities for structural change, with successful companies coming out of a slump or crisis in an improved position. The supermajors are armed with significant capabilities and resources to make strategic and opportunistic investments that can be important to their longer-term viability.
In fact, given the current market dynamics, some sort of consolidation is inevitable in the next year, and it’s more than likely going to happen via M&A activity in three ways:
The industry overall has seen a drastic decrease in value in the past three months (Figure 3), with market capitalization and overall enterprise value in free fall across all sectors.
What we know for sure
Never in history have O&G companies faced such a dual existential threat. With oil prices cratering, companies would typically be somewhat comforted by a boom in consumption. But not this time.
With all the uncertainty in the market, there are only three things that O&G companies know for sure:
How companies respond will define the industry for now and beyond.