Sidebar Discussion -- CLR, MRO In A "Consolidation Environment" -- October 21, 2020

A reader responded to thoughts about future of CLR in a "consolidation environment." [Of course, there's still Whiting, Oasis, and a host of others to consider.] But not to lose the comment, and to make it easier to access (browser search), I've brought a comment from another post to this page, as a stand-alone post:

Not sure if this is GMTA ("great minds think alike" or if my constant mentioning of the fit of MRO/CLR has actually percolated to analysts (or even the companies). But...I told you so. LOL.

"Of those companies left, there’s speculation that billionaire Harold Hamm’s Continental Resources Inc. may come to some agreement with Marathon Oil Corp., Paul Sankey, a New York-based analyst at Sankey Research said in a note."

https://www.worldoil.com/news/2020/10/21/us-shale-mergers-reshuffle-the-oil-production-landscape.

Note that CLR and MRO are both below $5B market cap, so the combination leaves them still less than Scott Sheffield's magic $10B level.

And they're both "good companies" on some intrinsic level. But given their debt and given $40 WTI strip, you have to really look at it as more like two weak sisters teaming up.

Still wonder who would run it and what would happen to the different organizations. Have to imagine MRO would as the more sophisticated multi-basin player. But Harrold's stake would still be 40%+ of the combined company. Maybe he would take it over? Interesting, interesting.

My reply:

The "two-weak-sister" argument is an incredibly good argument. As things consolidate -- it's sort of like musical chairs -- all the "stronger" companies -- made stronger by mergers, acquisitions -- start to take seats away from the table for the other weaker players. To get a seat at the table, these weaker "sisters" may need to join forces. 

One could see MRO with a wholly-owned subsidiary (CLR) run by Harold Hamm, giving Harold Hamm a directorship on the Board of Directors of MRO ... or as the reader suggests, something even bigger. It also makes it easier to spin off CLR down the road if things improve to make it possible. So many opportunities.

So, let's look at that linked "worldoil" article. Oh, wow, this is getting scary. I actually had that link from overnight and was going to post it later today -- after Sophia and I were finished for the day -- that is amazing -- a gazillion articles that could have been linked by either the reader and/or I and that's the one.

I already had the graphic ready to go. It's at the worldoil link above (archived):

I'll have to check CLR production later, but I believe it is in the 350K+ range but I could be way wrong. If it is 350K boepd, CLR would exceed Chevron and maybe even ExxonMobil, depending whether we're comparing "bbls of oil" or "bbls of equivalent oil."

CLR is tracked here. 

Over at SeekingAlpha, an article addressing this very issue just popped up. 

• "There's only going to be three or four independents that are investable by shareholders" among energy producers after the recent market rout, Pioneer Natural Resources CEO Scott Sheffield tells analysts after his company agreed to buy Parsley Energy for $4.5B in stock. 
• "The best companies have been picked off in the past few weeks." Sheffield believes the "real survivors" will be Pioneer-Parsley, EOG Resources, ConocoPhillips, and "maybe" Hess over the long-term. 
• Pioneer's purchase of Parsley will save ~$325M/year in debt repayments and cost reductions while also adding to free cash flow, but size also is key to the deal's success, Sheffield says. 
• "When you're talking to most investors today, they are only looking at companies that are investable at a $10B market cap," and companies below that level will need to merge over time. 
• Sheffield tells Bloomberg that his son, Parsley Chairman Bryan Sheffield, will not have a role in the combined company and will be a major investor, but Scotiabank analysts believe investors nevertheless may have concerns over the conflicts of interest between the two companies, which it sees as a buying opportunity. 
• TD Securities upgrades Pioneer to Buy from Hold, citing earnings accretion from the deal, as well as added size and scale. 
•  For Parsley investors, the premium may be a slight disappointment, according to analysts at Tudor Pickering Holt.