Last week saw some great rumors and add to the excitement as we head into #MergerMonday tomorrow.  ConocoPhillips is said to be in the final throes of negotiations with Concho, and for all the reasons outlined in the article last week, it seems likely to be announced later today. We will see, but I’m betting yes.

Earlier in the week, Paul Sankey outlined the reasons that Exxon and Chevron should ultimately get married and although I don’t disagree, I think the timing will be the question on that one.  In the next 5 years, absolutely.  But in the interim, there is a lot more M&A that needs to be done in the industry before either of those companies accept that a merger is inevitable.

While we are on the subject of Chevron, they closed it’s deal with Noble on October 5th and in the next 3 months, we should hear how Chevron ultimately plans to capture the significant synergies they described as part of the acquisition.

Even with all those great storylines, the juiciest rumor, which tees up this post, is the one that came out late Friday when it was said that a major company was looking at EOG.  It all sets up for a great Sunday evening/ Monday morning that will have nothing to do with Hunter Biden or the on again, off again stimulus talks.  Get your favorite drink ready and wait for the fireworks.

Let’s be clear, M&A right now is about “the synergies” and relative valuation.  With frac and rig fleets down 75%, capital activity in 2021 looking to be 25-35% lower than 2020 levels and with activity constrained by the combination of balance sheets and closed equity markets, the best a company can do is cut costs and try to survive.  That’s why “synergies” = headcount.

But, the EOG rumor, and for that matter, the Concho rumor, highlights an unspoken and rare outcome when it comes to headcount.  For more on that, we go back 14 years.

In 2006, when I was offered the move with Anadarko to the U.S. from our Canadian division (which was ultimately sold as part of repaying the debt from the Western Gas and Kerr McGee acquisitions), I expected that Anadarko management would stay in the most senior roles in the company.  We were, after all, the acquiring company.   At the time, I didn’t appreciate that what had led, in part, to the merger was what was affectionately known in the company amongst us worker bees as the “Marco Polo disaster.” The growth that had been expected from that platform was an epic fail that ultimately led to a change in strategy, brought Al Walker in as CFO (and ultimately CEO) and would lead a pivot to make onshore in the L48 the be all end all and would culminate in a huge cash acquisition with 1 year revolver in industry history.

Why do I raise this 14 years later: because from my vantage point as a middle manager in Anadarko at the time, it was the best orchestrated reverse takeover in industry.  It was certainly NOT Exxon buying XTO and leaving XTO in place to run their asset.  The senior roles were filled by Kerr McGee employees, many of the upper Anadarko folks that I had known and were a big reason I moved to back to the U.S., were eliminated, and the clock started ticking on my departure in 2009.

Let’s view the Major-EOG rumor in that light.  I believe that EOG is the best run onshore E&P in the U.S. and I think if you ask most people in industry, they would agree.  I have also argued that as a relative valuation, EOG isn’t a great acquiring company because their paper is undervalued relative to those they would buy and doing so would mark a rather significant deviation from their previous strategy.  BUT, as an an acquired company, their cash flow, their “premium inventory”, and most importantly, the way they have run their business and balance sheet would be massively accretive to a company that needs help supporting their dividend and, who honestly, isn’t viewed as a great operator.  If a major were to acquire EOG…. EOG would almost certainly run US operations.  You’d be crazy to not to implement an XOM-XTO type agreement, at least for the next 5 years.

Which brings us back to the pushback I got at the DAPL tournament in Denver on Friday about my article highlighting the synergies in the COP-CXO deal.  I said “unfortunately, the winners will be the management teams whose cash payments will soften the blow of the 50%+ reduction in share prices in the last year, and the losers are the employees on the acquired companies payroll.”  It is absolutely possible that COP will decide to let Concho continue to run the Permian from Midland, rather than moving COP employees to Midland.  BUT…. one way or another, the headcount of the combined entity will have to be reduced.

Two things are for sure:

1. Relative value mergers will continue to occur and if anything, the pace should pick up as 2021 budgets are finalized and borrowing base determinations loom large.
2. While there may remain some uncertainty as to which employee base may end up surviving, employees end up the losers, which underscores why capital discipline and mergers in 2018/2019 were so important (and unfortunately largely ignored in favor of the “Hope as a plan” strategy).