In this month’s edition of the Pipeline Technology Podcast sponsored by Pipeline & Gas Journal, Richard Nemec of PGJ joins Russel Treat to discuss the fluid M&A environment in the oil and gas pipeline industry.
In this episode, you will learn about the impact of COVID-19 on mergers and acquisitions, how the market changed in 2020 with deals down but dollars up, the impact of the recent cold snap in Texas and other parts of the U.S. affecting the pipeline business, what 2021 looks like for M&A activity, which players are in the mix to participate in asset consolidation, and other timely topics.
Pipeline Consolidations: Show Notes, Links, and Insider Terms
- Richard Nemec is contributing editor of Pipeline & Gas Journal (PGJ). Connect with Richard on LinkedIn.
- Pipeline & Gas Journal is the essential resource for technology, industry information, and analytical trends in the midstream oil and gas industry. For more information on how to become a subscriber, visit pgjonline.com/subscribe.
- Read Richard’s February 2021 PGJ article, Consolidation: Mergers and Acquisitions Embrace Oil Patch.
- M&A tracker: Keep tabs on M&A activity in the oil and gas pipeline industry using this deal tracker resource.
- Occidental/Anardko deal: In August 2019, Occidental Petroleum Corp. announced the acquisition of Anadarko Petroleum Corp. in a transaction valued at $55 billion, including the assumption of Anadarko’s debt.
- Energy Transfer/Enable deal: In February 2021, Energy Transfer and Enable Midstream Partners entered into a merger agreement calling for Energy Transfer to acquire Enable in an all-equity transaction valued at approximately $7.2 billion.
- Chevron/Noble deal: In October 2020, Chevron Corporation announced the acquisition of Noble Energy, including all of the outstanding shares of Noble, in an all-stock transaction valued at $5 billion.
- Haynesville Shale is a large rock formation that runs through East Texas, Arkansas, and Louisiana. Haynesville contains vast quantities of recoverable natural gas a/k/a shale gas that is second to Marcellus in the U.S.
- Woodford Shale spans the state of Oklahoma and contains complex geology and rock formations that are shale-rich. The Woodford Shale gas play began in the Arkoma Basin in 2004. The low price of natural gas beginning in 2009 shifted the focus of the Woodford Shale resource plays more toward condensate and oil areas.
- Mont Bellevue is a key fracking location in Texas. It is strategically located along the U.S. Gulf Coast, near major refining complexes and underground storage locations. Mont Bellevue boasts quick access to onshore and offshore transportation for shipping liquids to market. Mont Belvieu is a target for fracking expansion as part of U.S. shale gas production.
- California Resources Corporation (CRC) is an independent company and leading producer of oil and natural gas focused exclusively on California.
- West Texas Intermediate is a specific grade of crude oil and one of the main three benchmarks in oil pricing, along with the Brent and Dubai Crude benchmarks.
- Henry Hub Gas is the third-largest physical commodity futures contract in the world by volume. Investors can manage their risk using the highly liquid Henry Hub Natural Gas futures and options.
- Carbon Capture (CC) is the process of capturing waste carbon dioxide, transporting it to a storage site, and depositing it at a separate location where it will not enter the atmosphere.
- Vicki Hollub is the President and CEO of Occidental Petroleum Corp. Vicki recently stated that she sees the company’s future as a carbon capture company.
- Vicki also recently said that “there has to be a lot more consolidation” among U.S. upstream producers as industry seeks to restore the economies of scale necessary for shale developments.
- Vicki Hollub is the President and CEO of Occidental Petroleum Corp. Vicki recently stated that she sees the company’s future as a carbon capture company.
Pipeline Consolidations: Full Episode Transcript
Russel Treat: Welcome to the Pipeline Technology Podcast, episode seven. On this episode, our guest is Richard Nemec, Contributing Editor with Pipeline & Gas Journal. We’re going to talk to Richard about his February 2021 article in Pipeline Oil & Gas Journal titled, “Consolidation: Mergers and Acquisitions Embrace Oil Patch.”
Announcer: The Pipeline Technology Podcast, brought to you by Pipeline & Gas Journal, the decision-making resource for pipeline and midstream professionals. Now, your host, Russel Treat.
Russel: Richard, welcome to the Pipeline Technology Podcast.
Richard Nemec: Glad to be here.
Russel: Could you tell us a little bit about yourself and how you came to be writing articles for the Pipeline & Gas Journal?
Richard: Sure. I spent a good 25 years in the natural gas utility sector, and then since then, I’ve spent another 25 years writing about energy, principally oil and gas, but to a certain extent, or to a lesser extent, electricity. I’ve covered a whole range of subjects during that time, seen quite a change in the energy industry generally.
Russel: You certainly lived through some of the big cycles, too.
Russel: To say the least.
Richard: I can remember, back when in California, anyway, they were talking about importing LNG in the 1970s. Of course, none of that came to pass, and now, we’ve gone from imports to exports in liquefied natural gas.
Russel: I guess, that’s one thing that’s thematic about the business. It’s going to change. [laughs]
Russel: I asked you to come on to talk about your article in the February 2021 edition of the Pipeline & Gas Journal, where you write an article about mergers and acquisitions embracing an oil patch. Maybe, you could start by talking a little bit about COVID-19 and how did that impact M&A activity in 2020.
Richard: I don’t think the experts know exactly how much it impacted it, but, obviously, it’s had an impact. COVID-19, of course, has had a tremendous impact on the oil and gas industry globally with the decrease in demand and supply that’s come along with that.
With that, you had a lot of operators and E&P companies, service companies that have been through some real challenging times here in the last 12 months. A lot of that contributes to the interest in mergers and acquisitions, or consolidations.
Russel: I think it’s really interesting from an operational perspective. As the demand has gone down, the ability to take crude oil and natural gas is curtailed. You can’t turn that off quickly. You can’t turn it back on quickly. You don’t flip a switch. It’s more like running around, spinning plates on sticks. It takes a while to spool all that up. Certainly, that’s had some…
Richard: We’re really awash in storage in terms of globally for both oil and gas. We’ve got more than we need. Obviously, the export market for U.S. LNG is really pent up because of the problems from the COVID-19.
Russel: I should ask this question, too, because as we’re doing this recording, we’re about a week after the big snap in the Southwest. There’s a lot of news going on around all that. What do you think the impact of that cold snap’s going to be to all the gas and oil that was in storage? Is it going to have a material impact, or is it a blip?
Richard: I don’t know if it’ll have a material impact on the companies, per se, but it certainly has an impact on operations and the regulatory and political environment in which oil and gas is operating.
Russel: Yeah, no doubt. What was the nature of the activity that actually did occur in 2020 from an M&A perspective? What kind of deals were getting done?
Richard: Even before 2020, of course, there was the Occidental Petroleum/Anadarko deal, which was a megadeal. The experts considered it a real aberration, because deals of that size — I think this was in excess of 30 billion– aren’t going to come around very often. We did have a lot of sizable deals in 2020, but none of that same magnitude.
Most of the companies involved were looking for ways to expand their own strategic directions through the acquisitions. In a lot of cases, because of the price dive, they were getting assets at fairly reasonable and bargain prices in terms of making some of these multi-billion dollar deals that were made.
In the shale area, there’s quite a bit of activity now. Again, because of the COVID, where you have a number of winners and losers, a lot of the losers maybe are sitting on assets that are very valuable and attractive to companies with the stronger balance sheets and less debt on those balance sheets.
Russel: I thought one of the things that was interesting, to me, in your article is you were talking about how…There’s been a much smaller number of deals, but the deals themselves have been much larger, so the total dollars of M&A is way up, but the number of deals is way down. That’s pretty unusual.
Richard: Yeah. Probably, that may not continue. This year, it may be the reverse, that there might be a lot more deals, but for smaller total amounts. Most of the big players have gone through some pretty good acquisitions.
Chevron, I mentioned Occidental, ConocoPhillips, Devon Energy, and Diamondback Energy are just some of them. Anadarko itself, which was purchased by Occidental, of course, is a big player in the E&P sector.
Russel: Right. The other thing that’s happened recently is the Energy Transfer/Enable, which is another one of these very large — it’s a very large, multi-billion dollar acquisition. Obviously, that’s very strategic, because it gets Energy Transfer into the Haynesville and over to the Woodford and connects them up to their assets in Mont Bellevue.
That kind of thing, I think we’re going to see more of, is what you’re telling us.
Richard: Yeah. Energy Transfer, in that sense, is setting out to be the equivalent of TransCanada for Canada, or one of the other large interstate type pipelines, where they’re taking on a national perspective and operating area. They started not that long ago as a regional Texas pipeline.
Russel: Yeah. [laughs] It’s really interesting how quickly they’ve been able to grow. You talked about debt. I want to unpack that a little bit more.
Again, after reading your article, the conversation about debt, I think the people that are prime targets to be acquired are, particularly, the E&P, and to some degree, the midstream guys that are very highly leveraged. They’re going to be nice targets for those companies with strong balance sheets that would view those as strategic or synergistic assets.
Richard: At least, a lot of the pros that watch this say, as long as they’re not too overleveraged. California Resources Corporation out here went through Chapter 11 rather quickly last year. They’ve shed some debt, but they still have a tremendous amount of debt.
What they are is that they’re the former division of Occidental Petroleum for California. They’re the largest producer in California, but they’re having some real financial problems. They might be a target, for example.
Russel: Right. You were talking about the things that people are looking for. You talked about low-cost, strategic fit. What does strategic fit mean in this context?
Richard: In terms of the strategic fit, oh, probably where the assets are either geographically adjacent or very complementary to the assets of the acquiring company, is for one. The other would be maybe in terms of expertise that that particular acquired company has that the acquiring company needs.
Russel: We’ve already talked about debts. Then, the other thing we haven’t talked about, but you mentioned, the idea of opportunities to create synergistic growth. What would be an example of synergistic growth in this context?
Richard: There was one, I guess. It was a fairly large acquisition, where they were looking for specifically more of a stake in the Permian Basin. The acquired company had that really to a large extent. I think that one went for maybe $7 billion or $9 billion, but it was basically because of those Permian assets.
Russel: That was the Chevron/Noble deal. Chevron was looking for a bigger footprint in the Permian, and Noble had a very big footprint in the Permian, particularly, in the new shale.
Russel: Very true, very true. The other thing it’d be interesting to talk about a little bit in this context is, here in the last couple weeks, largely related to the cold snap, we’ve started to see prices recover. We’ve got West Texas Intermediate is peaking over 60 bucks, and we’ve got Henry Hub Gas at just over $3.
Do you think that’s a blip related to the cold snap, or is that a real recovery, or some combination of both?
Richard: It’s probably a combination of both. I think that was starting before the real severe cold snap. There’s a negative side to that in the sense that OPEC has indicated that, when prices start — for WTI — start getting over $55, that they’re going to be thinking of increasing production rather than choking it back, like they’ve agreed to.
In fact, at their most recent meeting, they agreed to for this month to do it. Now, when they meet again in March — which they’re doing because of the volatility going on, they’re meeting monthly — that they could raise production, and Saudi Arabia could pull back from the… I think there was an added million barrels that they were cutting back as of February. That may change if those prices stay above $55.
Russel: The other thing we ought to talk about is, you started out talking about COVID and the COVID impact. The vaccine is starting to scale up. More people are getting the vaccine.
Certainly, in some of the things I’m involved with around church and some ministry stuff, we’re starting to see people show up, because they’ve gotten the vaccine, and they feel comfortable getting out and about again. How is the vaccine and the COVID recovery going to impact all of this, in your opinion?
Richard: If it worked out the way, ideally, it would be another plus for the industry to rev up demand and supply again, but I don’t know. Now, there’s all these cautions about the variants in the virus that are happening in the U.S. Some people are predicting yet another big surge here in the next month or so.
Russel: Boy, I sure hope that’s not true.
Richard: I do, too.
Russel: There are a lot of people that I haven’t seen, other than on a screen share meeting, for a year now that I’d actually like to go hang out with again, right?
Richard: Right. [laughs]
Russel: I’m not missing the riding on airplanes and staying in hotels, but I am missing all my friends. I think that’s just part of where we’re at.
Richard: In any event, mergers and acquisitions will keep the lawyers and accountants busy.
Russel: Certainly. I think it’d be helpful, too. A lot of the people that tend to listen to the podcast tend to be engineers and operators. A lot of times, this conversation about M&A activity makes people nervous, because it’s fraught with uncertainty every time one of these is rolling around and happening, even though it’s a perpetual part of our business.
You’ve been doing this for a long time. What advice would you give to the folks that are working in the oil and gas business, working in the midstream business, related to this M&A activity, and how to ride the wave, if you will?
Richard: I’d expand my horizon in the sense that, in the gas industry, at least longer term, they’re looking at hydrogen as being one of the things that is going to save at least the infrastructure part of the natural gas industry. I’d be looking at what I could do in that ssector, and also in the efficiency area, because everybody’s looking at ways to get a lot more out of the same MCF of gas.
Russel: Yeah, get more out of the same maker of ground, get more out of the same physical footprint for the midstream asset, get more out of the actual end product itself, for sure.
Richard, my advice would be it’s always good to be aware that these waves come. You need to be a little bit of a surfer, and every once in a while, you raise your head up, look around, and ask, “Is the job I’m doing going to be around in another year, another 5 years, another 10? What skills do I need to develop?”
Certainly, what’s going to change is everything about our business. If you think about the shale, just the whole shale revolution, I remember 10 years ago, even — maybe a little longer than that — the whole conversation was peak oil. We were running out of supply.
Here we are, a decade later, and we’re having exactly the opposite conversation. We’ve got a glut.
Richard: Yeah, we’re awash.
Russel: I’ve been doing this not as long as you, but I’ve seen this happen in a big way probably four times now in my career, where the pendulum swings back and forth. That’s not going to stop.
In your article, you had a quote about this. I’ll just read this, because I want to talk about this. It says, “We are a resilient industry, and when we get knocked down, we get back up with more determination to be successful. These sort of things always seem to drive innovation and ingenuity in our industry.”
We tend to reinvent ourselves, and we make oil and gas cheaper to produce, cheaper to find, and more effective to use, and I don’t think that’s going to change.
Richard: I think the whole story of the shale revolution was reinventing ourselves in that regard.
Russel: There’s probably something on the horizon that somebody’s working on in their garage and as a science project that’s going to set us up to turn this all on its ear again. You mentioned hydrogen. There’s probably other things out there that are similar.
Richard: Yeah, the carbon capture and storage area, which Vicki Hollub there of Occidental, you were quoting, they’re making a big play in the carbon capture and storage area. That whole CO2 area, it could be big, given the climate change concerns.
Russel: Right. Certainly, the push around the new administration around climate change and a lot of companies looking at environmental safety and governance programs, all of those things could have impacts.
A lot of times, the guys and the gals that are actually out in the field doing the work, they’re the ones that have the best idea about, “You know, if we could do it this way, we could really make a difference.” My takeaway from all of this is just understand which way the pendulum’s swinging and the innovation it’s looking for.
Anything else you want to add about the article, Richard, before we wrap up here?
Richard: Not really. Maybe, the main takeaway might be that mergers and acquisitions aren’t going to go away. In some ways, it’s part of all industries, but in this regard, the level of uncertainties are probably higher than they should be, because of COVID and the global volatility right now.
Hopefully, there’ll be more stability coming by the end of the year, if, in fact, the COVID gets more under control than it is now.
Russel: That’s a great place to leave it. That’s the timeframe we’re looking at. In my anticipation, we’re 6 to 12 months from…Everybody’s talking about new normal or all that. I don’t think there is going to be a new normal, per se.
There’s going to be a new reality. We don’t know exactly what that’s going to look like, but there’s going to be a lot of difference in the way we’re operating. One of the big things about COVID that it’s done for us in the oil and gas business, and particularly in mine, is it’s made us a whole lot more comfortable not having to do all the travel.
I don’t think the travel’s going to come back. It’ll come back to some level, but not at the level it was before the change.
Richard: Yeah, I know I’ve covered a big conference up in the Bakken in North Dakota over the years. Last year, they were going to run it virtually. Then, they even canceled that, but this year, they’re starting up. They’re going to try to have it in-person, but also offer a virtual way to attend. That’s the way I’ll do it rather than go there right now.
Russel: There’s a lot of people looking at that. Nobody’s broken that code yet. It’s interesting times we live in, for sure.
Richard: Oh, yeah.
Russel: Look, Richard, I really appreciate your time. It’s been a pleasure talking to you. All the best. I look forward to hearing where you’re at in another year when you’re looking at this again.
Richard: All right, very good. Nice talking with you.
Russel: I hope you enjoyed this week’s episode of the Pipeline Technology Podcast and our conversation with Richard. If you would like to support this podcast, the best thing to do is to leave us a review on Apple Podcast, Google Play, or on your smart device podcast app. You could find instructions at pipelinerspodcast.com.
If there is a Pipeline & Gas Journal article where you’d like to hear from the author, please let me know either on the Contact Us page of pipelinerspodcast.com or reach out to me on LinkedIn. Thanks for listening. I’ll talk to you next month.
Transcription by CastingWords