The oil industry is consolidating. That's bad news for workers in Houston.

Mergers and acquisitions are sweeping the oil and gas industry, creating ever larger companies that can better withstand the crude market’s boom and bust cycles.

ConocoPhillip’s $9.7 billion takeover of Concho Resources and Pioneer Natural Resources’ $4.5 billion pursuit of Parsley Energy — both announced this week — are the latest attempts by beleaguered energy companies to pool resources and slash costs in the wake of the historic oil bust caused by the coronavirus pandemic. The deals come on the heels of Chevron’s nearly $12 billion acquisition of Houston-based Noble Energy this month, and Devon Energy’s plans to purchase WPX Energy for nearly $2.6 billion.

But this new wave of consolidation will leave behind a smaller industry with fewer players employing fewer workers, analysts say. That’s bad news for Houston, the nation’s energy capital, which has already lost thousands of jobs in recent oil busts.

“Everybody knows that when two companies come together, the sum of the two is not going to survive,” said Karr Ingham, a petroleum economist with the Texas Alliance of Energy Producers. “If Company X has 1,000 employees and Company Y has 1,000, you’re not going to have a combined company with 2,000 employees. The tendency is that consolidation causes job loss.”

Energy companies have laid off 17,500 drilling-related workers in the Houston region since 2018, with more than 70 percent of those cuts coming during the past six months of the pandemic, according to the Texas Alliance of Energy Producers. While it appears the job losses stemming from the pandemic are slowing this fall, more layoffs could be coming as companies merge and cut redundant positions.

The oil industry was contracting well before the pandemic hit, and consolidation is nothing new. Industry leaders have long acknowledged the need for consolidation as crude prices have crashed and as the outlook for oil demand has soured with the rise of actions to slow climate change.

However, the pace of mergers and acquisitions has accelerated since the coronavirus pandemic, which crushed demand for petroleum products such as gasoline and jet fuel.

“Any time you go through periods of low prices like what we see, it causes people to rethink the future,” Pioneer CEO Scott Sheffield told analysts Tuesday.

“Today, scale has never been more important,” Concho CEO Tim Leach told analysts Monday.

Riding it out

Oil and gas companies stopped drilling new wells, laid off thousands of workers and wrote down billions of dollars of assets to weather the pandemic. More than 30 North American oil and gas producers with more than $50 billion of debt have sought bankruptcy protection since the coronavirus pandemic spread widely through the U.S. in March, according to Dallas law firm Haynes and Boone.

Since crude prices have climbed to around $40 a barrel, up from around $15 a barrel in the spring, oil and gas companies are increasingly looking to join forces to better ride out the volatile market.

Chevron in late July kicked off the mergers and acquisitions trend with its takeover of Noble, which closed Oct. 5. The California oil major did not disclose how many jobs would be eliminated in the consolidation, but it said it would cut redundant corporate positions and reduce spending on consultants. The merger is expected to save $300 million in operating costs by 2021.

Southwestern Energy, a Spring-based oil and gas producer, announced plans in August to acquire Irving-based Montage Resources. The deal, valued at the time at about $210 million, is expected to close in the fourth quarter and is expected to save the combined company $30 million annually.

Devon in late September announced plans to acquire WPX for $2.6 billion, creating one of the nation’s largest shale producers in West Texas. The two Oklahoma-based companies said the deal, expected to close early next year, would save the companies $575 million.

ConocoPhillips on Monday said it plans to acquire Midland-based shale producer Concho for $9.7 billion, creating the largest independent oil and gas company in the U.S. The deal, which gives the Houston oil giant a larger position in the prolific Permian Basin, would save the two companies $500 million annually by 2022, the companies said.

Most recently, Pioneer on Tuesday shared plans to acquire Parsley for $4.5 billion, creating another Permian powerhouse. The combined company would save more than $325 million annually by 2021.

Willing to take a risk

Analysts say they’re unsure how long this wave of consolidation will last, given the difficult economic conditions and Wall Street’s unwillingness to extend capital to the struggling energy sector. Investors worried about company spending, mounting debt and dwindling returns have pulled out of the energy sector, which this year has become the worst performer of the S&P 500 stock index.

“Consolidation is needed, but I think consolidation is very difficult for many reasons from balance sheets to investor appetite,” said Jennifer Rowland, senior energy analyst with Edward Jones. “Finding that right deal is very challenging.”

Yet, oil and gas companies are pursuing mergers and acquisitions despite the risk of alienating investors. With energy stock prices so low, many oil and gas companies can’t resist snapping up valuable assets on the cheap — but only the largest and most well-funded companies can take the leap without falling.

“There’s a lot of reasons to have consolidation, but if the market perceives companies taking their eye off of investor returns, they will see their stock price fall,” said Mike O’Leary, a partner at law firm Hunton Andrews Kurth in Houston. “When your stock price gets slammed, it makes management teams and boards gun-shy.”

Source: houstonchronicle.com

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