Who Would Benefit?
A. Companies Positioned to Acquire
Companies with a strong balance sheet and top-tier operational capabilities could stand to profit from a prolonged exposure to the pandemic market. Following a general lock-up in the market from March to July, Chevron’s acquisition of Noble Energy ushered in a series of acquisitions on terms seemingly unattainable only months prior. For companies with the balance sheet that will place them in a position to acquire, the market will likely reward these generally all equity deals with a less than 10% premium paid for top-tiered assets.
B. Low Cost Operators
Across the board, the market has declared that it is unwilling to pay for production growth. Any such growth will need to come via the low-cost acquisition model referenced above, or via the ability to extract more value from existing assets by way of a low-cost operator model.
Those operators who can demonstrate lower breakeven costs due to access to superior rock and a lower cost structure should be able to pull away from the competition throughout a prolonged downturn.
C. Core Acreage Positions
Not all rocks are created equal. With a prolonged pandemic continuing an artificially depressed price environment, activity will gravitate to those areas providing operators the lowest breakeven costs. This means that activity will increasingly concentrate on the Permian Basin, as well as core areas of the Eagle Ford, Bakken, Marcellus, and Haynesville Shales. The core of these areas have largely been delineated, and we can expect operator focus to remain here in a low-price environment.
Who is Hindered?
Should the pandemic continue on in force through 2021, the bulk of market participants other than majors and those with assets outside of the Permian and core areas of the Eagle Ford, Bakken, Marcellus, and Haynesville Shales will face significant difficulty in demonstrating a meaningful value proposition. This includes operators heavily focused on non-core Eagle Ford, Bakken, Marcellus, Haynesville, as well as the less economic plays in the Tuscaloosa Marine, Barnett, Fayetteville Shales, the Powder River Basin and Mid-Continent.
Additionally, even for operators in premier areas, the ability to generate free cash flow from present operations is paramount. The pull-back in capital will severely punish, if not force the hand of, those operators whom have heretofore relied upon access to cheap and easy credit.