Upstream O&G M&A

environment
Pricing deals amidst uncertainty a high risk play

MARCH 2020
 O&G M&A market had ground to a halt by Feb 2020, even before March 2020
• Inability to reach agreement on price between buyers and sellers
• Market punitive to surviving acquirers

Key challenges to deal flow:

In the current • Asset quality highly variable
environment, •
•
Financial distress limits universe of potential buyers;
Pricing deals tough given volatility and uncertainty
M&A deals need
to be scalable at Many companies will be looking to sell assets (or themselves) given magnified
distress, but a number of distressed companies look more like destroyed assets
$40/bbl… than takeover rich opportunities

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or less
Potential transformational deal players include large IOCs and US tight oil
consolidators (including the Majors and well capitalized pure plays)

To restart M&A markets, sector may need to reach a new conventional wisdom
on the appropriate long term planning price – $40/bbl, not $60/bbl

1
Major restructurings have followed periods of oversupply

Upstream Corporate Transaction Value ($B) Brent ($/bbl)

2005:
200 1998: 1999: 160
COP/Burlington
Exxon/Mobil TOTAL/Elf 2009:
BP/Amoco BP/ARCO ExxonMobil/XTO 2015:
Shell/BG
2006: 2019:
150 2000: 120
Statoil/Hydro Oxy/APC
Chevron/Texaco
2001:

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Conoco/Phillips
100 80

50 40

0 0
1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019 2020
ytd
Brent Oil Price Corporate Transaction Deal Value No. of deals

Note: Excludes individual Asset Sale; Excludes downstream, midstream and OFS companies
Source: IHS Markit 2
 Mega-mergers: 2006+ deals: 2017-2019:
Pricing assumes low cost and Large deals premised on high Very few large deals, mostly North
significant technical challenges price assumptions ($60+) America basin consolidation

CVX/Texaco example of Recent deals struggle to create Basin consolidation for scale,
reducing overhead value when taken amidst earnings growth
volatility

Taken @ $5.5/Mbtu Permian

%
Henry Hub assuming
40 recovery in price
-47%
30
Other shale

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Assumes strong price
20 recovery $90/bbl in
2018
Low price assumption mean focus
10 on removing corporate overhead Oil sands
and gearing up to take on
technical challenges where
0 Taken @ $60/bbl
1999 2004 2009 2014 2019 WTI
'98

'02

'04

'06

'08

'12

'14

'16

'18

3-Year Weighted Avg. Opex as % of Revenue

3
Source: Company disclosures; S&P Capital IQ; BCG Center for Energy Impact
 1
New conventional wisdom on deal pricing – $40/bbl,
What would drive a not $60/bbl

new consolidation
model in the sector? 2
Scale, and scalable targets. This is unique for each
potential acquirer

Brent Forecast $/b

3
60 Worst-case
Portfolio replenishment requirements, as exploration
Best-case
disappears as a tool for reserve replacement in near term

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40
4
Sustained low prices drive push to remove duplicative
20 corporate costs

0 5
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Weak-economy deals tend to add more value than
'19 '19 '19 '19 '20 '20 '20 '20 strong-economy deals

4
Source: BCG Center for Energy Impact
 O&G M&A landscape: Huge loss of momentum in
2019 (except for Oxy-Anadarko deal)
O&G deal value fell by ~$38bn in 2019, excluding Oxy-APC deal Largest recent deals1
Deal value USD B
187 Acquirer Target Size (B$) Year
16
154 85.3 2015
145 147
2 141 139
60 0 0 65.5 2019
126 Oxy-
7 APC 15.5 2014
44
85 63 $66B
83 34 -26%
Canada
13.3 2017

10.5 2018

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47 shale
111 -53%
25 94
78 85 9.7 2018
60
37 40 9.7 2018
1 2 1
8.5 2017
2013 2014 2015 2016 2017 2018 20193 2020ytd
# of
M&A deals 8.4 2018
N. America 238 295 160 214 230 182 105 4 oil
sands
8.3 2017
Non-N. America 120 107 62 64 75 88 65 4
Global 1 2 1 0 2 1 2 0

Globally diversified deal value Outside North America deal value North America deal value
1. Deals announced between Jan 2014 and Mar 2020. 2. YTD = March 2020 5
Source: IHS Markit
Environment generally punitive to surviving acquirers

Oxy wealth creation Chesapeake wealth creation Ovintiv* wealth creation

Since Anadarko acquisition Since Wildhorse acquisition Since Newfield acquisition

Value of 100 invested in April 2019 Value of 100 invested in Oct 2018 Value of 100 invested in Oct 2018
150 150 150

100 100 100

50 50 50

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0 0 0
Apr Oct Oct
2019 2018 2018

"We expect that Oxy's stock could "We believe ECA investors would have "Our initial look at WRD's Eagle Ford well
come under further pressure regardless preferred the status quo vs. using an performance and economics would tell
of whether it is ultimately successful undervalued equity to add a third large us that this is not a project that should
in its APC bid or not" asset area.” compete for capital with CHK's legacy
Eagle Ford”
Note: Ovintiv (FKA EnCana); TSRs, share prices, and market cap as of March 2020.
Source: S&P Capital IQ; BCG ValueScience® Center 6
Deal count falls to 2-decade lows … but deal pricing for oil hasn't
as market conditions for yet been tested in lower price
transactions deteriorate … environment
Quarterly worldwide deal count 1999-Q1:2020 Deal pricing for gas collapsed in 2019 on low
prices, but held up for oil transactions
Deal Count Indexed implied Upstream deal value oil vs gas

150 250%

200%

100
150%

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100%
50

50%

0 0
'04 '06 '08 '10 '12 '14 '16 '18 '20
'98-01

'00-01

'02-01

'04-01

'06-01

'08-01

'10-01

'12-01

'14-01

'16-01

'18-01

'20-01

Blended avg. commodities prices

Oil wtd. asset 1P wtd. avg. implied value US$/boe
Source: IHS Markit
Gas wtd. asset 1P wtd. avg. implied value US$/boe
7
 Valuations at their lowest since Acquisitions premiums remain
2009 and likely to fall fast historically high and will be moved
downward for deals to proceed

Valuation multiples of Oil and Gas M&A over last 30 yrs. Premium of Transaction value to EV over last 30 yrs.

15 120

Median deal premium (%)

90
acquisition multiple
Median EV/EBITDA

10
Ø8

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60

5
30 Ø 33

0 0
'90 '95 '00 '05 '10 '15 '20 '90 '95 '00 '15 '10 '15 '19

Note: A review of completed Oil & Gas industry M&A from 1990 to March 20, 2020 with
deal value greater than 25 million with at least 75% of shares owned after transaction
Source: Refinitiv; BCG Analysis 8
 Asset deals
Already there is a large inventory of assets on the market, but asset
quality is highly variable

Large IOCs have significant, ongoing divestiture programs already in place

to meet debt reduction targets
Large number of These programs become even more critical given an immense cash crunch

assets and companies There is a limited inventory of large, world class assets on the market;
these are the assets that will find buyers
are on the market at
current prices, but Corporate deals

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deal value is highly
Corporate distress, already high in E&P at end 2019, is magnified at
existing prices

variable High debt, lack of access to external financing, and deteriorating earnings
potentially force more companies to seek buyers at distressed prices

Financial stress across industry limits universe of potential buyers

Corporate acquisition activity will be intermittent, focused on the highest

quality assets, not necessarily the distressed producers

9
More than $80bn assets on the market already
Canada $20 B+

Europe $20 B+

Russia and
$12 B+
Caspian

Asia Pacific $32 B+

Africa and

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$50 B+
Middle East

Latin America $45 B+

United States $120 B+

Global $80 B+

Note: as of March 13 2020

Sources: IHS Markit; Natural Earth Country boundaries without large lakes; Natural Earth Graticules 10
 As of March 17

US E&Ps: Debt maturity vs. cost of debt

Weighted average yield to maturity1 of debt2

3,540
Chesapeake Energy Whiting Petroleum
E&Ps reaching
Oasis Petroleum
Callon Petrolem Company

financial break Gulfport Energy

point in US, but 40

SM Energy Antero Resources

many may be Laredo Petroleum

Matador Resources Co.
QEP Resources

destroyed assets Range Resources

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rather than 20 Comstock Resources EQT Corp.
Southwestern Energy

distressed assets Apache Corp. PDC Energy

Oxy
Ovintiv Inc. WPX Energy Inc.

ConocoPhillips FANG
0
0 10 20 30 40 50 60
Liquids-focused Gas-focused % of debt due in next 24 months

1. Yield to maturity is the total return anticipated on a bond if the bond is held until it matures and is expressed as an
annual rate 2. Includes notes, bonds, debentures, and commercial paper
Source: Refinitiv Eikon; BCG analysis 11
 SG&A as a % of market capitalization – US unconventional sector

40%

Consolidation is
a huge
opportunity, 10%

particularly US
unconventionals 5%

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0%
$0 $10,000 $20,000 $80,000

Market cap($M)

Note: Selected companies with market caps between $500M and $10B include: OXY, EOG, Pioneer,
Cabot, Apache, Noble, Concho, Diamondback, EQT, Ovintiv, COP, Marathon, Continental, Chesapeake,
DGOC, AR, BRY, CDEV, CNX, CPE, CRZO, DNR, GPOR, JAG, LPI, MGY, MTDR, MUR, NOG, OAS, PDCE,
QEP, RRC, SM, SRCI, SWN, TALO, WLL, WTI, XOG, EQT, WPX, PE, XEC
Source: S&P Capital IQ 12
Vulnerable targets have high debt, low operating costs
but many lack sufficient scale to move the dial for large IOCs

Operating costs versus Debt/EV

Consolidators Stressed Vulnerable

300
Operating Costs per boe ($/bbl)

Shell

200 BP Clearly vulnerable, but most lack obvious strategic fit

XOM
Repsol
and desired scalability for a large IOC portfolio

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TOTAL

Chevron
100 Equinor Eni

Pioneer Devon Hess Tullow CHK

COP Parsley Sanchez
CNRL Ovintiv Oxy Oasis
Aker BP MRO Apache QEP Range Whiting
EOG WPX Continental PDC NBL SWN
Cabot Comstock Antero
Concho Lundin FANG Cimarex CNX Callon EQT
0
5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 85 90 95

Large IOCs' preferred targets are financially viable at Net Debt/EV

lower prices, but with depressed valuations
Bubble Size represents size of production
Note: Operating Costs = Cost of Good Sold + SGA + Other Operating Items
Source: S&P Capital IQ 13
Cash currently at a low levels… and getting lower
Cash on Hand
Cash & Near Cash Items, $bn
-14%
300
Ø 260
Russian Integrated
200
Latin Integrated
Asian Integrated
100 Euro Integrated

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E&P
Majors
0
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

• E&P: Continental, Concho, Apache, Hess, BHP, Cabot, Devon, EOG, EQT, Noble, Oxy, Pioneer, COP,
Marathon, Chesapeake, CNX, Antero, Cenovus, Diamondback
• Asian Integrated: PetroChina, ONGC, PTT, JXTG, Mitsui
Companies
• Global Integrated: BP, Chevron, ExxonMobil, TOTAL, Shell,
included • Euro Integrated: Eni, Equinor, Repsol, OMV, Galp, BASF, MOL
• Latin Integrated: Ecopetrol, Pampa Energia, Petrobras, YPF
• Russian Integrated: Lukoil, Tatneft, Gazprom Neft, Gazprom, Rosneft
Source: S&P Capital IQ 14
 Leverage creeping up for Europeans at $64

2019 Net debt/EV

40
Shell and BP missed 2019
Europeans at upper
reaches of desired
debt reduction targets
leverage range
30
Price crash will push
balance sheets to limit

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20
Balance sheet strength
divide between Europeans
and Americans firmly
10 Americans have much reestablished
lower debt, but lower
cash and ST investments
Transformational M&A deals
0 will not be first priority for
0 10,000 20,000 30,000 40,000
most in near term
Current cash position & short term investments
1. Additional debt capacity with Debt/EBITDA = 4.0. Debt/EBITDA rating = 4.0x correlates with maintaining investment grade (~ BBB rating) 15
2. LTM as of most recent filings as of March 2020
Source: S&P Capital IQ; BCG analysis; BCG ValueScience® Center
In the current environment, M&A deal flow will stall, but a
few transformative deals will occur over next 12 months

How can our clients prepare? What can BCG do to help?

1• Reevaluate plans for $40/bbl, not $60/bbl 1• Screen and evaluate strategic M&A options

2• Plan for a manageable downside at $30/bbl; • Evaluate Total Shareholder Return impact of

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2
which targets and opportunities work? potential portfolio moves

3• Spend time to think outside the box 3• Identify and quantify scope for potential
synergies
4• Screen and evaluate strategic M&A options
4• Post-merger integration to realize synergies
and build platform for success

16
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