Evercore: Super Majors Ripe for Consolidation and Other Restructuring
Despite their relative safety during the downturn, large integrated oil companies must make some moves to get higher returns and more investor support, analysts at Evercore ISI said in a Nov. 13 webinar that covered a wealth of industry concerns.
Doug Terreson, senior managing director and head of energy research, said that during the last merger phase, which started in 1998, companies were focused on returns at the expense of growth. That lasted until 2008, when their capital spending per shareholder distributions increased and then returns declined.
“Both internal and external initiatives are available to the management teams of the super majors, which would enhance their profile with investors in the equity market,” he said.
He noted that ConocoPhillips in 2009 and early 2010 recognized this and began an internal “clear the decks” restructuring of selling off assets, which led to higher returns, high valuations and better performance in the stock market.
“The only hesitancy we have with this option is, this company was selling assets when oil prices were near $100 per barrel. Today, Brent is closer to $50 per barrel and returns aren’t going to be as strong this time around to get the bang for the buck that other companies received through restructuring in years past,” he said.
The other option for the majors and super majors is consolidation, he said. More cash flow is being devoted to paying off debt than the market has seen since 1999, making conditions right for consolidation in the exploration and production (E&P) space. However, management needs their investors’ support for such transactions, and that might be difficult for some to come by.
During the last five years, the average E&P paid itself about $40 million annually while annuals returns for shareholders compounded at 2 percent.
“We think if transactions end up being hostile, these companies are going to have a hard time garnering support from shareholders when considering what appears to be a pay and performance disconnect,” he said, adding that when considering significant underperformance by U.S. integrated oil and E&P entities, “We question the defense of management teams and business models that obviously have not served shareholders very well.”
Still, the approach would serve both shareholders and management well. With consolidation, debt is restructured with more favorable terms. Combined, these companies typically spend about two-thirds of what they would spend as separate entities, Torreson said. Consequently, they are able to enhance the value of their purchases, he said.
If the 12 largest E&Ps consolidated into six companies, it would consolidate two-thirds of the three largest shale basins in North America.
“With the growth in U.S. shale oil supply during the last few years and the U.S. contribution to global oil supply growth in the last several years … [consolidation] result in more measured spending. More measured future growth in non-OPEC supply would follow because capital and resources would be concentrated in fewer, more disciplined hands,” he explained.
Winners And “Others”
Senior managing director at Evercore, Stephen Richardson, said there will be a significant bifurcation between those companies that emerge stronger from the downturn and those that don’t. E&P companies will begin to climb out first, he said, and Evercore expects a rebalancing in 2016.
That bifurcation won’t necessarily be a bad thing, said James West, senior managing director of the oilfield services group.
“These conditions will ultimately cleanse the oil patch and will set the stage for a sustained upcycle, with large-cap diversifieds being the primary beneficiary of a gain in market share and pricing power,” he said. “Large public companies stand to benefit from shrinking environment as smaller, private companies go out of business. A third of the commodity providers of service in North America are basically going to go away in this down cycle.”
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