Taking too long? Close loading screen.
Connect with us

Business

Oil Industry Turns to Mergers and Acquisitions to Survive

Published

on

HOUSTON — The once mighty oil and gas industry is flailing, desperately trying to survive a pandemic that has sharply reduced demand for its products.

Most companies have cut back drilling, laid off workers and written off assets. Now some are seeking out merger and acquisition targets to reduce costs. ConocoPhillips on Monday announced that it was acquiring Concho Resources for $9.7 billion, the biggest deal in the industry since oil prices collapsed in March.

Coming days after the completion of Chevron’s takeover of Noble Energy, the acquisition would create one of the country’s biggest shale drillers and signals an accelerating industry consolidation as oil prices languish around $40 a barrel, just above the levels many businesses need to break even. Just last month Devon Energy said it would buy WPX Energy for $2.6 billion.

But many investors are not sure such deal making will be enough to protect the industry from a sharp decline. The share prices of ConocoPhillips and Concho fell modestly on Monday. The big problem is that the fortunes of oil companies are fundamentally tied to oil and natural gas prices, which remain stubbornly low. Few experts expect a full recovery of oil demand before 2022, and some analysts have gone so far as to declare that oil demand might have peaked in 2019 and could slide in the years to come as the popularity of electric cars grows.

“There’s a lot more red ink than there is black gold,” said Michael Lynch, president of Strategic Energy and Economic Research, who periodically advises OPEC. “Companies are trying to hunker down and weather the storm. Most people don’t think the oil price will recover for a couple of years.”

More than 50 North American oil and gas companies with debts totaling more than $50 billion have sought bankruptcy protection this year. Among the casualties was Chesapeake Energy, a shale pioneer based in Oklahoma City. More failures could come in the next two years as companies are required to repay tens of billions of dollars in debt.

Oil companies are facing daunting uncertainties, particularly as concerns over climate change mount and governments impose tougher regulations to reduce greenhouse gas emissions caused by the burning of fossil fuels. Small companies fear a crackdown on methane leaks and tightening regulations, especially if former Vice President Joseph R. Biden becomes president and Democrats take control of the Senate.

#styln-briefing-block { font-family: nyt-franklin,helvetica,arial,sans-serif; background-color: #ffffff; color: #121212; box-sizing: border-box; margin: 30px auto; max-width: 510px; width: calc(100% – 40px); border-top: 5px solid #121212; border-bottom: 2px solid #121212; padding: 5px 0 10px 0; } @media only screen and (min-width: 600px) { #styln-briefing-block { margin: 40px auto; } } #styln-briefing-block a { color: #121212; } #styln-briefing-block ul { margin-left: 15px; } #styln-briefing-block a.briefing-block-link { color: #121212; border-bottom: 1px solid #cccccc; font-size: 0.9375rem; line-height: 1.375rem; } #styln-briefing-block a.briefing-block-link:hover { border-bottom: none; } #styln-briefing-block .briefing-block-bullet::before { content: ‘•’; margin-right: 7px; color: #333; font-size: 12px; margin-left: -13px; top: -2px; position: relative; } #styln-briefing-block .briefing-block-bullet:not(:last-child) { margin-bottom: 0.75em; } #styln-briefing-block .briefing-block-header-section { margin-bottom: 16px; } #styln-briefing-block .briefing-block-header { font-weight: 700; font-size: 1.125rem; line-height: 1.375rem; display: inline-block; margin-bottom: 5px; } @media only screen and (min-width: 600px) { #styln-briefing-block .briefing-block-header { font-size: 1.25rem; line-height: 1.5625rem; } } #styln-briefing-block .briefing-block-header a { text-decoration: none; color: #333; } #styln-briefing-block .briefing-block-header a::after { content: ‘›’; position: relative; font-weight: 500; margin-left: 5px; } #styln-briefing-block .briefing-block-footer { font-size: 14px; margin-top: 1.25em; /* padding-top: 1.25em; border-top: 1px solid #e2e2e2; */ } #styln-briefing-block .briefing-block-briefinglinks a { font-weight: bold; margin-right: 6px; } #styln-briefing-block .briefing-block-footer a { border-bottom: 1px solid #ccc; } #styln-briefing-block .briefing-block-footer a:hover { border-bottom: 1px solid transparent; } #styln-briefing-block .briefing-block-header { border-bottom: none; } #styln-briefing-block .briefing-block-lb-items { display: grid; grid-template-columns: auto 1fr; grid-column-gap: 20px; grid-row-gap: 15px; line-height: 1.2; } #styln-briefing-block .briefing-block-update-time a { color: #999; font-size: 12px; } #styln-briefing-block .briefing-block-update-time.active a { color: #D0021B; } #styln-briefing-block .briefing-block-footer-meta { display: none; justify-content: space-between; align-items: center; } #styln-briefing-block .briefing-block-ts { color: #D0021B; font-size: 12px; display: block; } @media only screen and (min-width: 600px) { #styln-briefing-block a.briefing-block-link { font-size: 1.0625rem; line-height: 1.5rem; } #styln-briefing-block .briefing-block-bullet::before { content: ‘•’; margin-right: 10px; color: #333; font-size: 12px; margin-left: -15px; top: -2px; position: relative; } #styln-briefing-block .briefing-block-update-time a { font-size: 13px; } } @media only screen and (min-width: 1024px) { #styln-briefing-block { width: 100%; } }

European oil companies have already begun pivoting away from oil and gas, plotting investments in renewable energy like wind and solar to attract new investors. While those companies have had limited success so far, American companies have for the most part stuck with their traditional businesses. They have adapted to low oil and gas prices by slashing investments by 30 percent or more. The oil and gas rig count has dropped by 569 since last fall, to only 282 operating across the country.

Oil companies are hoarding cash and renegotiating contracts with service companies that drill and complete wells. Rig rental rates are down roughly 10 percent, pressuring the companies that do the field work. More than 100,000 American oil workers have lost their jobs in recent months.

ConocoPhillips, the largest American independent oil company, has been something of an outlier, recently raising its dividend and buying back shares. Nevertheless, ConocoPhillips’ stock price has dropped by roughly half so far this year.

The company is a major producer in the Bakken shale field of North Dakota and Eagle Ford shale field in South Texas. By acquiring Concho, it will become a major player in the world’s most lucrative shale field, the Permian Basin, which straddles West Texas and New Mexico.

With Concho’s 550,000 acres in the Permian, ConocoPhillips will more than triple its current 170,000-acre position in the basin, which became the world’s most productive oil field last year.

Concho is little known outside of Texas but became a major oil producer after it bought RSP Permian for $9.5 billion in 2018. Concho produced more than 300,000 barrels in the second quarter.

“Together ConocoPhillips and Concho will have unmatched scale and quality,” said Ryan M. Lance, ConocoPhillips’ chairman and chief executive, referring to their joint balance sheet, resource reserves and personnel.

The deal would help make ConocoPhillips one of the largest players in the Permian, putting it in the same league as companies that are much bigger than it overall.

“The combination is remarkable,” said Robert Clarke, a vice president and oil analyst at Wood Mackenzie, a research and consulting firm. “Just in regards to scale, ConocoPhillips is adding enough Permian production to nip at the heels of ExxonMobil’s massive program.”

As the shale industry grew over the last decade or so, many smaller companies poured billions of dollars into the Permian and other parts of the country. Now, the process appears to be headed in the opposite direction as the industry retrenches and becomes smaller.

Investment in U.S. shale oil has dropped to an estimated $45 billion this year from roughly $100 billion annually in 2018 and 2019, according to the International Energy Agency. In its annual report released this month, the Paris-based organization said a shakeout was underway.

“The influence of large players is set to grow as acreage is consolidated by larger industry players, and the focus on growth is set to be supplanted over time by a focus on returns,” the report said. “The exuberance and breakneck growth of the early years may be replaced by something a little steadier.”

American oil production fell to 11.2 million barrels a day in September from 13 million at the beginning of the year. The Energy Department expects production to fall an additional 200,000 barrels a day by mid-2021 as companies drill fewer new wells to replace older ones.

The industry has no choice but to cut back. Americans drove 12.3 percent fewer miles inAugust than they did in the same month a year earlier, according to the Transportation Department.

Globally, daily oil consumption was down by more than 6 percent in September from a year earlier, according to the Energy Department. Oil production continues to outpace demand, keeping inventory levels high and prices low.

And the pandemic is not yet under control in many parts of the world. If sustained, the recent increase in coronavirus infections in the United States, Europe and elsewhere could reduce demand for oil and gas even further in the coming months.

Source

Continue Reading
Advertisement
Click to comment

Leave a Reply

Your email address will not be published. Required fields are marked *

Business

The Trump campaign celebrated a growth record that Democrats downplayed.

Published

on

The White House celebrated economic growth numbers for the third quarter released on Thursday, even as Joseph R. Biden Jr.’s presidential campaign sought to throw cold water on the report — the last major data release leading up to the Nov. 3 election — and warned that the economic recovery was losing steam.

The economy grew at a record pace last quarter, but the upswing was a partial bounce-back after an enormous decline and left the economy smaller than it was before the pandemic. The White House took no notice of those glum caveats.

“This record economic growth is absolute validation of President Trump’s policies, which create jobs and opportunities for Americans in every corner of the country,” Mr. Trump’s re-election campaign said in a statement, highlighting a rebound of 33.1 percent at an annualized rate. Mr. Trump heralded the data on Twitter, posting that he was “so glad” that the number had come out before Election Day.

The annualized rate that the White House emphasized extrapolates growth numbers as if the current pace held up for a year, and risks overstating big swings. Because the economy’s growth has been so volatile amid the pandemic, economists have urged focusing on quarterly numbers.

Those showed a 7.4 percent gain in the third quarter. That rebound, by far the biggest since reliable statistics began after World War II, still leaves the economy short of its pre-pandemic levels. The pace of recovery has also slowed, and now coronavirus cases are rising again across much of the United States, raising the prospect of further pullback.

“The recovery is stalling out, thanks to Trump’s refusal to have a serious plan to deal with Covid or to pass a new economic relief plan for workers, small businesses and communities,” Mr. Biden’s campaign said in a release ahead of Thursday’s report. The rebound was widely expected, and the campaign characterized it as “a partial return from a catastrophic hit.”

Economists have warned that the recovery could face serious roadblocks ahead. Temporary measures meant to shore up households and businesses — including unemployment insurance supplements and forgivable loans — have run dry. Swaths of the service sector remain shut down as the virus continues to spread, and job losses that were temporary are increasingly turning permanent.

“With coronavirus infections hitting a record high in recent days and any additional fiscal stimulus unlikely to arrive until, at the earliest, the start of next year, further progress will be much slower,” Paul Ashworth, chief United States economist at Capital Economics, wrote in a note following the report.

Source

Continue Reading

Business

Black and Hispanic workers, especially women, lag in the U.S. economic recovery.

Published

on

The surge in economic output in the third quarter set a record, but the recovery isn’t reaching everyone.

Economists have long warned that aggregate statistics like gross domestic product can obscure important differences beneath the surface. In the aftermath of the last recession, for example, G.D.P. returned to its previous level in early 2011, even as poverty rates remained high and the unemployment rate for Black Americans was above 15 percent.

Aggregate statistics could be even more misleading during the current crisis. The job losses in the initial months of the pandemic disproportionately struck low-wage service workers, many of them Black and Hispanic women. Service-sector jobs have been slow to return, while school closings are keeping many parents, especially mothers, from returning to work. Nearly half a million Hispanic women have left the labor force over the last three months.

“If we’re thinking that the economy is recovering completely and uniformly, that is simply not the case,” said Michelle Holder, an economist at John Jay College in New York. “This rebound is unevenly distributed along racial and gender lines.”

The G.D.P. report released Thursday doesn’t break down the data by race, sex or income. But other sources make the disparities clear. A pair of studies by researchers at the Urban Institute released this week found that Black and Hispanic adults were more likely to have lost jobs or income since March, and were twice as likely as white adults to experience food insecurity in September.

The financial impact of the pandemic hit many of the families that were least able to afford it, even as white-collar workers were largely spared, said Michael Karpman, an Urban Institute researcher and one of the studies’ authors.

“A lot of people who were already in a precarious position before the pandemic are now in worse shape, whereas people who were better off have generally been faring better financially,” he said.

Federal relief programs, such as expanded unemployment benefits, helped offset the damage for many families in the first months of the pandemic. But those programs have mostly ended, and talks to revive them have stalled in Washington. With virus cases surging in much of the country, Mr. Karpman warned, the economic toll could increase.

“There could be a lot more hardship coming up this winter if there’s not more relief from Congress, with the impact falling disproportionately on Black and Hispanic workers and their families,” he said.

Source

Continue Reading

Business

Ant Challenged Beijing and Prospered. Now It Toes the Line.

Published

on

As Jack Ma of Alibaba helped turn China into the world’s biggest e-commerce market over the past two decades, he was also vowing to pull off a more audacious transformation.

“If the banks don’t change, we’ll change the banks,” he said in 2008, decrying how hard it was for small businesses in China to borrow from government-run lenders.

“The financial industry needs disrupters,” he told People’s Daily, the official Communist Party newspaper, a few years later. His goal, he said, was to make banks and other state-owned enterprises “feel unwell.”

The scope of Mr. Ma’s success is becoming clearer. The vehicle for his financial-technology ambitions, an Alibaba spinoff called Ant Group, is preparing for the largest initial public offering on record. Ant is set to raise $34 billion by selling its shares to the public in Hong Kong and Shanghai, according to stock exchange documents released on Monday. After the listing, Ant would be worth around $310 billion, much more than many global banks.

The company is going public not as a scrappy upstart, but as a leviathan deeply dependent on the good will of the government Mr. Ma once relished prodding.

More than 730 million people use Ant’s Alipay app every month to pay for lunch, invest their savings and shop on credit. Yet Alipay’s size and importance have made it an inevitable target for China’s regulators, which have already brought its business to heel in certain areas.

These days, Ant talks mostly about creating partnerships with big banks, not disrupting or supplanting them. Several government-owned funds and institutions are Ant shareholders and stand to profit handsomely from the public offering.

The question now is how much higher Ant can fly without provoking the Chinese authorities into clipping its wings further.

Excitable investors see Ant as a buzzy internet innovator. The risk is that it becomes more like a heavily regulated “financial digital utility,” said Fraser Howie, the co-author of “Red Capitalism: The Fragile Financial Foundation of China’s Extraordinary Rise.”

“Utility stocks, as far as I remember, were not the ones to be seen as the most exciting,” Mr. Howie said.

Ant declined to comment, citing the quiet period demanded by regulators before its share sale.

The company has played give-and-take with Beijing for years. As smartphone payments became ubiquitous in China, Ant found itself managing huge piles of money in Alipay users’ virtual wallets. The central bank made it park those funds in special accounts where they would earn minimal interest.

After people piled into an easy-to-use investment fund inside Alipay, the government forced the fund to shed risk and lower returns. Regulators curbed a plan to use Alipay data as the basis for a credit-scoring system akin to Americans’ FICO scores.

China’s Supreme Court this summer capped interest rates for consumer loans, though it was unclear how the ceiling would apply to Ant. The central bank is preparing a new virtual currency that could compete against Alipay and another digital wallet, the messaging app WeChat, as an everyday payment tool.

Ant has learned ways of keeping the authorities on its side. Mr. Ma once boasted at the World Economic Forum in Davos, Switzerland, about never taking money from the Chinese government. Today, funds associated with China’s social security system, its sovereign wealth fund, a state-owned life insurance company and the national postal carrier hold stakes in Ant. The I.P.O. is likely to increase the value of their holdings considerably.

“That’s how the state gets its payoff,” Mr. Howie said. With Ant, he said, “the line between state-owned enterprise and private enterprise is highly, highly blurred.”

China, in less than two generations, went from having a state-planned financial system to being at the global vanguard of internet finance, with trillions of dollars in transactions being made on mobile devices each year. Alipay had a lot to do with it.

Alibaba created the service in the early 2000s to hold payments for online purchases in escrow. Its broader usefulness quickly became clear in a country that mostly missed out on the credit card era. Features were added and users piled in. It became impossible for regulators and banks not to see the app as a threat.

ImageAnt Group’s headquarters in Hangzhou, China.
Credit…Alex Plavevski/EPA, via Shutterstock

A big test came when Ant began making an offer to Alipay users: Park your money in a section of the app called Yu’ebao, which means “leftover treasure,” and we will pay you more than the low rates fixed by the government at banks.

People could invest as much or as little as they wanted, making them feel like they were putting their pocket change to use. Yu’ebao was a hit, becoming one of the world’s largest money market funds.

The banks were terrified. One commentator for a state broadcaster called the fund a “vampire” and a “parasite.”

Still, “all the main regulators remained unanimous in saying that this was a positive thing for the Chinese financial system,” said Martin Chorzempa, a research fellow at the Peterson Institute for International Economics in Washington.

“If you can’t actually reform the banks,” Mr. Chorzempa said, “you can inject more competition.”

But then came worries about shadowy, unregulated corners of finance and the dangers they posed to the wider economy. Today, Chinese regulators are tightening supervision of financial holding companies, Ant included. Beijing has kept close watch on the financial instruments that small lenders create out of their consumer loans and sell to investors. Such securities help Ant fund some of its lending. But they also amplify the blowup if too many of those loans aren’t repaid.

“Those kinds of derivative products are something the government is really concerned about,” said Tian X. Hou, founder of the research firm TH Data Capital. Given Ant’s size, she said, “the government should be concerned.”

The broader worry for China is about growing levels of household debt. Beijing wants to cultivate a consumer economy, but excessive borrowing could eventually weigh on people’s spending power. The names of two of Alipay’s popular credit functions, Huabei and Jiebei, are jaunty invitations to spend and borrow.

Huang Ling, 22, started using Huabei when she was in high school. At the time, she didn’t qualify for a credit card. With Huabei’s help, she bought a drone, a scooter, a laptop and more.

The credit line made her feel rich. It also made her realize that if she actually wanted to be rich, she had to get busy.

“Living beyond my means forced me to work harder,” Ms. Huang said.

First, she opened a clothing shop in her hometown, Nanchang, in southeastern China. Then she started an advertising company in the inland metropolis of Chongqing. When the business needed cash, she borrowed from Jiebei.

Online shopping became a way to soothe daily anxieties, and Ms. Huang sometimes racked up thousands of dollars in Huabei bills, which only made her even more anxious. When the pandemic slammed her business, she started falling behind on her payments. That cast her into a deep depression.

Finally, early this month, with her parents’ help, she paid off her debts and closed her Huabei and Jiebei accounts. She felt “elated,” she said.

China’s recent troubles with freewheeling online loan platforms have put the government under pressure to protect ordinary borrowers.

Ant is helped by the fact that its business lines up with many of the Chinese leadership’s priorities: encouraging entrepreneurship and financial inclusion, and expanding the middle class. This year, the company helped the eastern city of Hangzhou, where it is based, set up an early version of the government’s app-based system for dictating coronavirus quarantines.

Such coziness is bound to raise hackles overseas. In Washington, Chinese tech companies that are seen as close to the government are radioactive.

In January 2017, Eric Jing, then Ant’s chief executive, said the company aimed to be serving two billion users worldwide within a decade. Shortly after, Ant announced that it was acquiring the money transfer company MoneyGram to increase its U.S. footprint. By the following January, the deal was dead, thwarted by data security concerns.

More recently, top officials in the Trump administration have discussed whether to place Ant Group on the so-called entity list, which prohibits foreign companies from purchasing American products. Officials from the State Department have suggested that an interagency committee, which also includes officials from the departments of defense, commerce and energy, review Ant for the potential entity listing, according to three people familiar with the matter.

Ant does not talk much anymore about expanding in the United States.

Ana Swanson contributed reporting.

Source

Continue Reading

Trending