The once all-powerful oil and gas industry is spinning its wheels. It is trying intensely to survive the COVID-19 pandemic that has dramatically decreased the demand for its products.

Many outfits have reduced their drilling operations, laid off workers, and written off assets. Per the New York Times, some players are considering M&A targets to reduce costs. The energy sector continues to consolidate with lower fuel prices and less demand.

ConocoPhillips – Concho Oil and Gas Merger

ConocoPhillips did announce one recent deal. It has agreed to buy U.S. shale oil producer Concho Resources for $9.7 billion. It’s a low-premium, all-stock deal that would move ConocoPhillips up the list as one of the top oil and gas producers in the Permian Basin. That’s the prime U.S. oilfield that stretches from West Texas to southeastern New Mexico.

Concho shareholders will receive 1.46 shares of ConocoPhillips for each share held.

ConocoPhillips and Concho expect to capture $500 million of annual cost and capital savings by 2022.

The acquisition also would make the company the largest U.S. independent oil and gas producer. It would have an output of 1.5 million barrels per day (bpd).

Currently Concho is the fifth-largest producer by volume in the Permian. It is pumping about 319,000 bpd from its wells spread across more than half a million acres. Conoco is a major producer in two additional U.S. shale fields, but pumps about 50,000 bpd in the Permian Basin.

Development for Value to Free Cash for Sharehlders

ConocoPhillips says the company’s portfolio will be developed for value and free cash flow and will target an average reinvestment level of less than 70% of cash from operations to make certain that there’s sufficient free cash flow generation to fund compelling returns of capital to shareholders.

Many American shale companies have been experiencing losses because of the weak crude prices, however, unlike in past slowdowns, companies haven’t been able to raise new capital to restructure heavy debts. Analysts say that the industry has been trying to consolidate after many shale producers leveraged their bets on higher prices. But the prices dropped. The shale investors had little to show for the rising oil and gas output.

Concho had $3.9 billion in long-term debt at the end of June 2020. The company hasn’t posted an annual profit since 2018. Its second-quarter loss was $435 million, more than a loss of $97 million in 2019.

ConocoPhillips Follows Right After Chevron’s Oil and Gas Deal

The ConocoPhillips acquisition took place just days after the completion of Chevron’s acquisition of Noble Energy. The Chevron deal was all-stock valued at $5 billion, or $10.38 per share. Noble Energy shareholders will receive 0.1191 shares of Chevron for each Noble Energy share. Observers estimate the total enterprise value of the transaction, including debt, at $13 billion.

Noble Energy’s proved reserves at year-end 2019 add roughly 18% to Chevron’s year-end 2019 proved oil and gas reserves at an average acquisition cost of less than $5/boe, and almost 7 billion barrels of risked resource for less than $1.50/boe.

Will This Protect the Industry’s Fall?

Investors are concerned that these mergers and acquisitions won’t be enough to protect the industry from a sharp decline.

The primary issue is that the profits of oil companies are fundamentally tied to oil and natural gas prices. These prices continue to be low. No one expects a full recovery of oil demand before 2022, and there are a handful of analysts who have even said that oil demand may have peaked in 2019 and could slide in the years to come as the popularity of electric cars continues.

There were more than 50 North American oil and gas companies with debts totaling over $50 billion that sought bankruptcy protection in 2020. One of these was Chesapeake Energy, a shale pioneer based in Oklahoma City. There may be more failures to come in the next two years because oil and gas companies must then repay tens of billions of dollars in debt.

American oil production fell to 11.2 million barrels a day in September from 13 million at the beginning of 2020. The U.S. Department of Energy says that production will continue to fall an additional 200,000 barrels a day by mid-2021 with companies drilling fewer new wells to replace older ones. Added to this is the fact that Americans drove 12.3% fewer miles in August than they did a year earlier, according to the Transportation Department. As a result, the industry must cut back.