Oil prices are low, and likely to stay that way for a while. And while low prices can be brutal for oil producers, they're also an opportunity: When the going gets tough, Big Oil often gets even bigger.
But will the pandemic-induced price collapse lead to dramatic deal-making and companies scaling up? Some analysts aren't holding their breath.
"I do believe that the golden age of the mega deals in oil and gas may be gone," says Muqsit Ashraf, who leads the energy practice for the consulting firm Accenture.
Between the short-term uncertainty of the pandemic, and the long-term uncertainty of climate change, he doesn't expect most companies to leap at the chance to expand their oil reserves.
"The new normal is going to be very different," Ashraf predicts.
A roller coaster, then the doldrums
Oil prices took an extraordinary dive this spring, at one point dropping below zero for the first time in history. That meant traders were actually paying people to take oil off their hands.
Now things have stabilized, with crude prices hovering around $40 a barrel — down from about $60 at the start of the year.
"Obviously compared to a negative number, anything would be better than that," says Jennifer Rowland, an analyst with Edward Jones. "Certainly we've come a long way."
But $40 is still too low for many U.S. producers to make a profit. And prices could stay here for a while, as a huge oil glut persists and demand remains low.
"Air travel is definitely not recovered," says Bernadette Johnson, the vice president of market intelligence at Enverus. "Even people moving in vehicles ... how many folks are driving to work again? There's some, but not the majority."
Opportunity and urgency ...
The low price of crude oil has already caused bankruptcies in the U.S. oil and gas industry, which employs about 350,000 people — down from about 500,000 five years ago.
And it should be creating an opportunity for consolidation, too. When prices are low, merging helps companies survive by allowing them to cut costs by scaling up. Mergers also become cheaper, as strong companies can suddenly buy up rivals at fire-sale prices.
Think back to 1998. If you were driving then, you might remember that gasoline suddenly got much cheaper. That was because the price of oil had collapsed — a price crash that led to a wave of mega-deals that created oil giants. BP merged with Amoco; Chevron with Texaco; Exxon and Mobil became ExxonMobil.
Some analysts say another wave of mergers is coming.
"Every time the pendulum swings this this direction and you have a dramatic market shock ... it has set the stage for consolidation," says Gianna Bern, a professor of finance at the University of Notre Dame.
Consolidation of U.S. shale producers, in particular, "seems inevitable," says Daniel Yergin, vice chairman of IHS Markit and author of the forthcoming The New Map: Energy, Climate, and the Clash of Nations. "The wild ride and lower prices in the oil market since the coronavirus pandemic began in March has made this even more urgent," he says.
... but a sea of uncertainty
But so far, companies aren't striking deals.
Andrew Dittmar, an analyst at Enverus, says mergers and acquisitions activity in the most recent quarter was remarkably low.
"There's not a lot of potential buyers out there," he says. "Management's being extremely cautious" about making acquisitions, thanks to high debt and skeptical investors.
Rowland, with Edward Jones, expects that pandemic mergers will continue to be the exception, not the rule.
"I don't expect just a kind of rampant consolidation, although it probably would be healthy for the industry," she says. Instead, she expects more bankruptcies.
There's a much larger uncertainty about the oil industry's future: Successfully fighting climate change would mean a shift away from fossil fuels. Carmakers are going electric and renewable energy is on the rise.
Now, the pandemic is raising huge questions on an even shorter time frame. How long will the pandemic last? And how might it permanently transform our energy consumption?
None of this changes the fundamental logic of combining operations. David Dell'Osso is the chief operating officer of Parsley Energy, an Austin-based shale producer that recently finished acquiring rival Jagged Peak before the coronavirus crisis struck.
Dell'Osso says scaling up has helped the company make money — even at $40 oil. The timing worked out too, he says: "I could not be happier about the fact that we're not having to try to absorb a company in the middle of a global health pandemic."
Dell'Osso says there are opportunities in this crash, and an oil bust like this typically separates viable companies from ones that can't cut it. But he's also quick to note that the crisis caused by the pandemic is hardly a typical price crash.
"This is something that literally affects everybody in every country on the globe," he says. "There's a lot that we don't know yet but ... I think this time it really is different."
The oil industry has seen many downturns before, and companies that survive a bust often go on to thrive in the next boom. But a pandemic?
"We're in uncharted waters," says Dittmar, the Enverus analyst.
AILSA CHANG, HOST:
When it comes to booms and busts, there's no industry more accustomed to riding them out than the oil industry. In fact, during bad times, big oil often gets even bigger. But during this pandemic, as NPR's Camila Domonoske reports, low oil prices come with new uncertainty.
(SOUNDBITE OF SONG, "...BABY ONE MORE TIME")
BRITNEY SPEARS: (Singing) Oh, baby, baby, how was I supposed to know?
CAMILA DOMONOSKE, BYLINE: Back in 1998 when Britney Spears had her first big hit, something wasn't right in the oil market. You might remember when gas dropped to about a dollar a gallon. The price of crude had collapsed.
GIANNA BERN: It was the lowest price - yeah - lowest price post-World War II.
DOMONOSKE: Gianna Bern is a professor at the University of Notre Dame. The oil industry used words like catastrophe. But every oil bust is also an opportunity. Merging is a way to cut costs, and strong companies can suddenly buy up their rivals for cheap. So in 1998...
(SOUNDBITE OF MONTAGE)
UNIDENTIFIED REPORTER #1: The proposed multibillion-dollar merger of Chevron and Texaco...
UNIDENTIFIED REPORTER #2: BP Amoco, as the new oil company will be called...
UNIDENTIFIED REPORTER #3: ExxonMobil would be, by most measures, the biggest corporation on Earth.
DOMONOSKE: That wave of megadeals reshaped the oil industry. Fast-forward to this April.
(SOUNDBITE OF SONG, "BLINDING LIGHTS")
THE WEEKND: (Singing) Sin City's cold and empty. No one's around to judge me.
DOMONOSKE: The Weeknd was at the top of the charts - streets empty, the economy in lockdown. In a few places, gasoline actually cost a dollar again. And oil plummeted like never before. CNBC was gobsmacked.
(SOUNDBITE OF MONTAGE)
MELISSA LEE: Minus $36 a barrel - yes, minus 36 bucks.
JIM IUORIO: That we got tankers of oil and no place to put them.
DOMONOSKE: It was the first time in history oil prices went negative. And while the market has recovered a lot, oil is still stuck at a pretty low price, and it's likely to stay there as the virus keeps the world from burning as much oil as usual.
Bernadette Johnson is the vice president of market intelligence at Enverus.
BERNADETTE JOHNSON: Air travel is definitely not recovered. Like, how many folks are driving to work again? There are some, but not the majority.
DOMONOSKE: The low price has already caused oil bankruptcies. And just like in 1998, this should be a prime opportunity to snap up rivals at bargain prices. A major wave of mergers could be coming, but there's no sign of it yet. And some experts aren't holding their breath.
MUQSIT ASHRAF: I do believe that the golden age of the megadeals in oil and gas may be gone.
DOMONOSKE: Muqsit Ashraf leads the energy practice for the consulting firm Accenture. He cites debt loads, skeptical investors and, above all, the pandemic. It's created so much uncertainty that companies aren't confident about trying to scale up.
ASHRAF: We may see an odd one here and there, but we should not expect a steady stream of blockbuster deals.
DOMONOSKE: There's a much larger uncertainty about the oil industry's future. Successfully fighting climate change would mean a shift away from fossil fuels. Carmakers are going electric, and renewable energy is on the rise. Now the pandemic is raising huge questions on an even shorter time frame. Will the current upheaval cause permanent changes to our behavior, to our economy?
David Dell'Osso is the chief operating officer of Parsley Energy, which is based in Austin. The company actually just finished merging with a rival before the crisis hit.
DAVID DELL'OSSO: I could not be happier about the fact that we're not having to try to absorb a company in the middle of a global health pandemic.
DOMONOSKE: Dell'Osso says operating on a larger scale has helped the company make money. And he says an oil bust like this typically separates viable companies from ones that can't cut it. But he also says this isn't a typical price crash.
DELL'OSSO: I mean, this is something that literally affects everybody in every country on the globe. And there's a lot that we don't know yet. But I think, you know, the whole - this time is different. I think this time it really is different.
DOMONOSKE: The oil industry has seen downturns before and come out stronger. But like the rest of us, it's never gone through something like this.
Camila Domonoske, NPR News. Transcript provided by NPR, Copyright NPR.