Breakingviews - White House can lend U.S. shale a helping M&A hand

Pump jacks operate at sunset in Midland, Texas, U.S., February 11, 2019. Picture taken February 11, 2019. REUTERS/Nick Oxford

DALLAS (Reuters Breakingviews) - U.S. President Donald Trump could be getting ready to play M&A adviser in the oil patch. American energy independence is a main tenet of his administration, but that goal is now seriously threatened: The black gold price war between Saudi Arabia and Russia will make many U.S. drillers uneconomic. Encouraging mergers that effectively create a state-backed oil company may be the best way to give the U.S. domestic industry a helping hand.

Shale drilling was already struggling. Chevron is one of the big players in the Permian basin, the oil field spanning West Texas and New Mexico that was responsible for more than half of U.S. oil production last month. The $155 billion oil giant’s U.S. upstream business lost $5 billion last year when the average price for West Texas Intermediate was $57 a barrel.

On Monday, that benchmark fell almost 25% to just over $31 a barrel after Saudi Arabia slashed its official selling price in response to Russia shunning an agreement to cut production. Chevron’s stock fell 15%. Smaller, U.S.-focused drillers fared far worse: Shares in Pioneer Natural Resources and Parsley Energy, two shale leaders, dropped by more than a third, while Apache plummeted 54%. Solvency could rapidly become a problem. Apache’s net debt is approaching 3 times EBITDA, and that could grow quickly if prices stay low. Noble Energy, whose sales come nearly entirely from U.S. oil patches, is even more leveraged.

Saudi and Russia have an advantage over the United States. Their oil supply is state-controlled and regionally concentrated, so their drillers can operate at a loss for as long as the economy can stand it. The U.S. business is fragmented, competitive and aiming to turn a profit. This dynamic helped shale drillers take market share when OPEC was supporting prices, but if they can’t respond to price drops in unison, they could put each other out of business.

The U.S. government could quietly encourage industry consolidation, as it has been in other industries like telecom. It could also take a page from the financial crisis playbook by backstopping debt or creating a fund to absorb bad loans. That would make it easier for shale drillers to keep operating, despite steep losses, and even to buy or be bought. Such moves may be anti-capitalist, but they suit Trump’s protectionist, America-first leanings.


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