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Shale Mergers Strengthening: ETFs to Benefit

Sanghamitra Saha
·4 min read

The energy space has warmed up to solid deal activities with the U.S. shale industry announcing back-to-back merger deals. The move came as many U.S. shale companies are struggling with losses due to weak crude prices.

Stable oil price is another reason for an uptick in energy sector consolidation. “While $40 oil is not high enough to restart the prolific shale machine, the absence of volatility is allowing producers time to take stock of how best to survive the ongoing Covid-19 downturn,” per the CEO of oilfield services company Canary, LLC, as quoted on Forbes.

“Those without very strong balance sheets are trying to survive,” said Concho Resources Chief Executive Tim Leach, as quoted on Reuters. The deals will give struggling companies better synergies and help them cut costs. Per Leach, companies with stronger balance sheets will buy weaker firms.

“Investors are increasingly looking for companies with market values of at least $5 billion, preferably those that pay dividends. While most of the larger shale firms pay dividends, a Refinitiv Eikon index of U.S. oil-and-gas producers has lost 55% this year, compared with the S&P 500’s 7.4% rise,” Reuters article noted.

Financial firms could also turn out to be potential buyers in the coming days, as many smaller energy companies bear heavy levels of debt. North American producers have around $86 billion of rated debt maturing through 2024, according to Moody’s Investors Service, as quoted on Reuters.

Inside the latest Deals

Pioneer Natural Resources Company PXD, one of the largest independent shale operators, announced on Oct 20 a low-premium $4.5 billion buyout of Parsley Energy Inc. PE. Shares of Parsley gained more than 5% while Pioneer Natural Resources shares were down 4%.

This week, ConocoPhillips COP has also announced that it will purchase Permian-focused shale oil driller Concho Resources CXO for $9.7 billion, in the largest shale deal this year.The latest Conoco-Conchodeal islow-premium, all-stock in nature. The deal swaps 1.46 shares of ConocoPhillips for each Concho share, at a premium of about 1.5% over its Friday price (read: Conoco-Concho Merge: ETFs in Focus on 2020's Top Shale Deal).

The purchase puts ConocoPhillips to the ranks of the top producers in the Permian Basin, the prime U.S. oilfield, and tags it as the largest U.S. independent oil and gas producer, pumping 1.5 million barrels per day (bpd). The deal will give ConocoPhillips an opportunity to create low-cost supply,” per the CEO Ryan Lance, adding Concho has “a low-cost supply that fits.”

A few weeks back, there was the merger of Devon Energy Corp DVN and WPX Energy WPX, which created a $12 billion entity with a robust upstream position in the Permian Basin. Devon Energy’s $2.6 billion all-stock deal was also low premium in nature in which it bought WPX Energy in September.

ETFs in Focus

The above-mentioned deals may improve the journey ahead for the ETFs that have solid weights in the players.

iShares U.S. Oil & Gas Exploration & Production ETF IEO

ConocoPhillips – 15.63%; Concho Resources – 4.6%; Pioneer – 4.4%;

VanEck Vectors Unconventional Oil & Gas ETF FRAK

ConocoPhillips – 8.25%; Concho Resources – 4.5%; Pioneer – 6.9%; Parsley – 3.87%, Devon Energy – 3.6%

John Hancock Multi-Factor Energy ETF JHME

ConocoPhillips – 6.00%; Concho Resources – 3.1%

SPDR S&P Oil & Gas Exploration & Production ETF XOP

Pioneer – 3.4%; Parsley – 2.87%, Devon Energy –3.9%,Parsley – 3.7%; WPX Energy – 3.4%

Invesco Dynamic Energy Exploration & Production ETF PXE

ConocoPhillips – 5.21%; Concho Resources – 5.3%; Pioneer – 5%; Parsley – 2.87%, Devon Energy – 2.9%

First Trust Indxx Global Natural Resources Income ETF FTRI

ConocoPhillips – 8.94%

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ConocoPhillips (COP) : Free Stock Analysis Report
 
Pioneer Natural Resources Company (PXD) : Free Stock Analysis Report
 
Concho Resources Inc. (CXO) : Free Stock Analysis Report
 
Devon Energy Corporation (DVN) : Free Stock Analysis Report
 
WPX Energy, Inc. (WPX) : Free Stock Analysis Report
 
Parsley Energy, Inc. (PE) : Free Stock Analysis Report
 
iShares U.S. Oil Gas Exploration Production ETF (IEO): ETF Research Reports
 
VanEck Vectors Unconventional Oil Gas ETF (FRAK): ETF Research Reports
 
John Hancock Multifactor Energy ETF (JHME): ETF Research Reports
 
Invesco Dynamic Energy Exploration Production ETF (PXE): ETF Research Reports
 
SPDR SP Oil Gas Exploration Production ETF (XOP): ETF Research Reports
 
First Trust Indxx Global Natural Resources Income ETF (FTRI): ETF Research Reports
 
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