The days of not having much new to talk about in the oil and gas industry came to an abrupt halt last month after Chevron Corp. slapped down a bid to buy Anadarko Petroleum Corp., followed shortly thereafter by Occidental Petroleum Corp. (Oxy) raising the stakes to take the prize.

At least that’s how BDO’s Clark Sackschewsky sees it. The market expert and leader of BDO’s Natural Resources practice discussed during a recent interview with NGI how the tug-of-war between Chevron and Oxy has likely struck a spark for more mega-mergers and acquisitions (M&A).

“We had about five months there where it was pretty dead in the industry,” Sackschewsky said. The day Chevron’s offer was unveiled, “I was just absolutely inspired by it.”

Chevron’s cash-and-stock deal is estimated to be worth a total of around $50 billion, including debt. Oxy’s total offer is estimated at around $57 billion. While Anadarko’s board has agreed to continue to negotiate with Oxy, the Houston-based independent gained a major supporter in Berkshire Hathaway Inc., which has agreed to invest up to $10 billion to help usurp Chevron’s bid.

More often than not, Sackschewsky said, one big merger is followed soon after by another. Based in the BDO’s Houston office, he has worked on hundreds of oil and gas transactions and led more than 50 different engagements for upstream, midstream and downstream clients.

What makes this acquisition a bit different is that many producers have throttled back their spending, and Anadarko’s takeover is coming at a premium price.

“Companies are trying to figure out what is the expectation from investors and capital,” he said. They have committed to living within cash flow, something they’ve never overall done as an industry. “Everybody is trying to figure out what that means in how to move forward.”

Before upstream austerity took hold following the 2014 oil bust, producers went to work when commodity prices were strong, following a mantra to “take as much capital as we can to drill holes in the ground,” Sackschewky said. “Now they are saying, ‘I don’t have unfettered access to capital and I have to live within my means.’ So that just kind of limits how we can actually grow.”

However, the Anadarko “raffle,” as he calls it, may change some perceptions.

“At the end of the day, with much of the world’s easy-to-reach oil already consumed, oil and gas companies are tasked with producing more with less,” and whether one party can make more money off an asset than another. Companies can make money by producing oil and gas through drilling and production -- or by selling their assets, he said.

When there are parties that “know what they are doing, what they are going after, the rest of the money will follow fast.”

Show Me The Money

The industry will see “lots of capital is coming back in,” Sackschewsky said. “There’s going to be actual excitement, something for everyone to rally around because there’s never just one of these. Every time we have one of these kinds of larger transactions, two or three of them happen and then all of that trickles down to the independents, private equity, because now there’s going to be some assets changing hands.”

Before the Anadarko offers were on the table, there was consolidation last year among Lower 48 operators, including Encana Corp.’s takeover of Newfield Exploration Co., Diamondback Energy Inc.’s merger with Energen Corp. and Concho Resources Inc.’s all-stock merger with RSP Permian Inc.

However, dealmaking slumped late last year and into the first quarter, with domestic M&A deal values plunging to a record 10-year low, according to Drillinginfo. The largest first quarter deal was in late March, as Diversified Gas & Oil plc agreed to pay $400 million for HG Energy II Appalachia LLC’s gas wells in Pennsylvania and West Virginia. Overall, 1Q2019 dealmaking fell 93% year/year.

Chevron has indicated it would divest $15-20 billion of assets if it completes the Anadarko merger. Oxy, if it takes the prize, has also said assets would be sold, including substantial liquefied natural gas properties.

“Who’s going to buy those? There will be a diversified buyers’ market, from the majors to independents to private equity. I got very excited for the industry,” he said.

The market will be wide open for buyers of all stripes, and assets sales likely will take time, no matter which company is the eventual buyer.

“There’s going to be enough churning to keep all of us busy.”

Only one company is going to take the prize. Whichever company fails to take over will still have “all their dry powder to wait and do another deal. So whoever loses, I will not be surprised to see another transaction fairly quickly.”

Game Of Thrones?

The mega-deal would upset the “order” of the oil and gas majors, however. The oil majors, he said, “would want to get back in order...Egos are going to drive a lot of this.”

More of the majors may look for opportunities once the Anadarko transaction is done, including buying up major independents so that they can keep their place in line.

All things being equal, with production strong and oil and natural gas exports expanding, Sackschewsky was asked what he thinks will happen in the Permian over the next few years.

“I think the majors are going to control things,” he said.

The majors have their flags in other Lower 48 basins, but it’s nothing like the Big Oil crowd that has descended upon the Permian. There are also good reasons they will end up in control, said the BDO expert.

The North American unconventional industry appears to be mirroring a scenario similar to the auto manufacturing industry. In the early 1900s, there were a lot of car manufacturers but they were only able to produce one or two vehicles at a time. Henry Ford introduced mass production, which lowered costs and created operating factories.

“The Permian is heading in that direction now,” Sackschewsky said. The majors “have figured out how to get oil out efficiently...Now it’s time to create the assembly line to increase that production. I think that’s the direction the Permian is going.”

As to where the supply will go if not for domestic consumption, Sackschewsky said it would depend on the usual suspect: price.

There are plenty of global takers for U.S. oil and gas, “but at some point somewhere along the way, it’s all about price. We can become more efficient on the export side and have the capabilities to export and to increase those exports.” But the bottom line always takes the prize.

It’s a lesson that members of the Organization of the Petroleum Exporting Countries are learning.

“One of the differences with the Permian and the whole shale play is that producers are able to turn on and off the spigot pretty quickly,” Sackschewsky said. “Saudi Arabia hadn’t anticipated that in the 2014 peak that producers really could turn it on, turn it off pretty quickly…

“I think that helps, to some extent, the ability to modulate” how much the United States may export and still fetch good pricing.

“But the other aspect is that we haven’t hit the full domestic market, either,” he said. Refineries that import sour oil may at some point along the way determine that it would be cheaper for them to reconfigure their facilities to use Lower 48 sweet oil.

When there are parties that “know what they are doing, what they are going after, the rest of the money will follow fast.”