Pandemic hastens global shale industry M&A trend

Global shale production has taken a drastic hit in 2020 due to the COVID-19 pandemic, with shale oil output expected to drop by 11.7% year-on-year and shale gas production by 4.5%, according to projections by GlobalData.

The US led the global shale industry in 2019 – with over 98% share in shale oil production and over 78% share in shale gas production, reports the market analyst. Shale production was also carried out in Canada, China and Argentina. However, the effect of the COVID-19 pandemic has been particularly harsh on the US shale industry in 2020; as oil prices fell, shale operations became unviable in many US plays due to higher breakeven costs.

Ravindra Puranik, Oil and Gas Analyst at GlobalData, says: ‘The US shale market has been vibrant since recovering from the 2014 price crash. Shale oil and gas production across major plays was generally on an upward trend in 2018 and 2019. However, the downturn this year has brought in unprecedented challenges to the shale industry. It has disrupted the recent momentum of the industry and may take years to recover.’

The shale industry, especially in North America, has faced the brunt of the economic downturn. This has led oil and gas companies involved in shale operations to reduce their planned capital expenditure for 2020. In the Permian Basin alone, major shale drillers reduced their planned capital expenditure for this year by over $18bn.

Puranik adds: ‘Independent shale operators in the US are among the worst hit from this downturn as operations in some wells of the Bakken or Eagle Ford shale are no longer sustainable. Operators have resorted to taking wells offline to manage costs. Debt-ridden operators are even facing difficulty in drawing liquidity from financial institutions to sustain operations. Consequently, Chesapeake Energy, Whiting Petroleum and a few other shale players have filed for bankruptcy in 2020.’

However, on a more positive note, oil prices have stabilised of late around the $40/b mark. Comparatively low company valuations and gradually improving oil prices have encouraged some operators to undertake M&As in the shale industry. Recently, Chevron completed the acquisition of Noble Energy in a deal valued at $13bn.

Puranik concludes: ‘Low energy demand and the low oil prices is expected to have a significant impact on the M&A activity within the shale industry. Companies operating in the sector could attempt to mitigate the losses borne during the downturn through consolidation. The events of this year are likely to hasten the M&A trend in the shale industry.’

Figure 1: Global shale oil and gas production outlook, 2010–2023
Source: GlobalData