Oil prices have fallen so steeply this month that it's no longer profitable for many companies to drill new wells in major U.S. patches.
Why it matters: Deal activity slows dramatically when the underlying economics don't work.
- This was true during both the 2014 and 2020 oil price downturns, and comes amidst what already was a weakening environment for energy M&A.
By the numbers: WTI opened this morning at $61.03 per barrel, and was below $60 both yesterday and as of this writing.
- According to a Dallas Fed survey of oil and gas firms, WTI must be at least $61 per barrel to be profitable for new wells in the Midland Basin, which is part of the Permian Basin, and only goes up from there.
- It's $62 for the Eagle Ford and Permian's Delaware Basin, $63 for other U.S. shale, $66 for U.S. nonshale, and $70 for elsewhere in the Permian.
- The profitability thresholds are significantly lower for existing wells, topping out at $45.
Behind the scenes: "An even bigger issue than just lower crude prices is the volatility and policy uncertainty that makes it difficult to negotiate fair value for deals," explains Andrew Dittmar, an analyst with Enverus Intelligence Research.
- He adds that most companies will "hunker down" by focusing on existing wells and relying on hedges.
Flashback: Oilfield consolidation
drove the M&A market in 2023 and
early 2024.
- This included a lot of exits by private equity, which now has a relatively low level of U.S. shale exposure. Maybe they were prescient, or maybe just lucky.
Look ahead: There normally are two ways for energy deals to pick back up, the first of which is price increases.
- The second is price projection confidence. Firms may not be happy if they conclude that prices will remain below $60 into 2026, but at least it can help them make disposal decisions. And it could come fast and furious, as it did in the second half of 2020.
- One big caveat, however, is the aforementioned consolidation. There just aren't as many stray assets lying around, which means the M&A market may need to rely on breakups.
The bottom line: President Trump's
policies so far have favored lowering pump prices over boosting production, at least in the short-term.
- For now, they've also encouraged dealmakers to watch from the sidelines.
