Nelson in Energy Intelligence Finance: U.S. Shale Could Face Shake-up

09/29/2017

Anadarko Petroleum created a stir in the markets when it introduced a plan to buy back 10 percent of its shares over the next two years, upending conventional wisdom that the U.S. shale business would continue to favor growth over returns. While not all companies can emulate Anadarko's capital discipline, an important shift to a value-over-volume strategy could be emerging in the U.S. onshore business with big implications for every facet of the industry, Energy Intelligence Finance reported.

Anadarko, which is based north of Houston, has allocated $2.5 billion from its $6 billion in cash on hand to buy back shares, with $1 billion to be spent by the end of the year. The move drew strong endorsement from analysts covering the company and was widely seen as a potential inflection point for an industry long seen as profligate (EIF Sep. 20 '17). Analysts at investment bank Wells Fargo called it a "positive development" because "it addresses the valuation discount, answers questions on uses of at least a portion of the cash on the balance sheet, and further reinforces management's message of capital discipline and focus on returns with the 2018 upstream program expected to generate substantial free cash flow at $50 oil." …

The biggest question for oil markets is how such a shift could impact the meteoric growth seen from the U.S. onshore industry, particularly from the Permian Basin. …

One big impact could be in mergers and acquisitions (EIF Apr. 26 '17). Some analysts have said that companies that are at least cash flow neutral could better fit within the portfolios of the supermajors, who thus far have defied expectations and eschewed acquiring independents. … 

But the supermajors could also find more competition for their takeover targets from smaller rivals, said Bill Nelson, partner at law firm Haynes and Boone, LLP. "I think cash flow neutrality will make it more possible to do merger-of-equals transactions," he told Energy Intelligence Finance. "It puts companies in a position to acquire another company that might have more leverage and still have a healthy resulting company."

Excerpted from Energy Intelligence Finance. To read the full article, click here. (Subscription required)

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