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Our takeaways from the Conoco-Concho merger



ConocoPhillips’s $9.7bn deal for Concho Resources shows that the long-expected shale consolidation phase is well and truly under way. It will not be the last takeover in the US’s battered oil patch — as news of talks between Pioneer Natural Resources and Parsley Energy shows.

Our first note looks at what was behind the Conoco-Concho deal. Opec’s latest meeting, held against the worrying backdrop of the second coronavirus wave and renewed lockdowns, is the topic of our second.

Thanks for reading. Please get in touch at You can sign up for the newsletter here. — Derek

Conoco goes for shale scale

Ryan Lance, ConocoPhillips chief executive, said yesterday that the shale sector’s “consolidation is both necessary and inevitable”. After the recent Chevron-Noble Energy deal and Devon Energy-WPX merger, Mr Lance’s acquisition of Concho Resources shows that the inevitable has arrived.

Here are the key points from the transaction:

Scale: The addition of Concho, which produced 200,000 barrels a day of oil in the third quarter, will make Conoco the world’s largest independent oil company, with output of around 1.5m barrels a day.

Price tag: Including debt, the $9.7bn deal value rises to $13.3bn, according to Citibank, making it the biggest shale-focused acquisition in the wake of the 2020 oil-price crash.

Permian focus: Conoco yesterday emphasised the breadth of its shale position in the US — but this deal was about the Permian, where Concho is a leader. The combined company will have 700,000 acres to drill in the Permian’s Delaware and Midland basins. Concho’s cost of supply in the Permian is “in the low to mid-$30s”, Conoco said yesterday — a benefit to Conoco, one of the first operators to curtail expensive production when oil prices plunged earlier this year.

Column chart of Tight oil completions since Jan 2019 showing Deal multiplies Conoco's Permian footprint by factor of eight

Break-even: All told, Conoco said the combined entity would enjoy free cash flow break-even oil prices of $34 a barrel. Add in the dividend — continued payment of which would remain a “first priority” — and costs would be covered at $41/b.

Biden risk: Despite deepening its position in the Delaware’s federally controlled acreage in New Mexico, Mr Lance was “comfortable with the risk” that a Biden administration, if elected, could change leasing rules. Both companies “have enough assets on the nonfederal acreage to support development for a decade and beyond”, he said.

Market reaction: Share prices for both companies were flat after the deal was confirmed — the market had already digested rumours of the move, reported by Bloomberg earlier this month. Most analysts liked what they saw. Some said it marked a vote of confidence in US shale.

“[Conoco] has been one of the most diversified of its peer group, and was likely part of the reason its performance has been so stellar. Doubling down on the Permian reduces portfolio diversification and feels counter cyclical to the idea that US E & Ps are going to start looking internationally because tight oil is out of favour,” said Alex Beeker, principal corporate analyst at Wood Mackenzie.

Bar chart of Tight oil completions since Jan 2019 showing Concho buy catapults Conoco into the big league of shale operators

Size matters: “Today, scale has never been more important,” said Tim Leach, Concho’s chief executive, who will join the Conoco board. Tudor Pickering Holt & Co said that by gaining scale, Conoco now has “a solid investment opportunity to own crude leverage when the environment improves”.

Bargain hunting: Low-cost equity deals are the new M&A model in a shale patch where no one wants to spend cash. At 15 per cent, the premium Conoco will pay Concho’s shareholders is better than that paid by Chevron for Noble Energy. But at a market capitalisation of $9.7bn, a huge windfall it is not. Concho’s market cap at the start of the year was almost twice as great.

“We have long believed that nil-premium mergers would be the pathway for US shale equities. While the underlying resource is extremely competitive (low cost, short payback, long asset life), the industry is too highly fragmented with too many managements, too much G & A, too much growth ambition and too little focus on shareholders,” said analysts at Citibank.

Which companies are next? Concho’s Permian rivals Pioneer and Parsley appear next in line. Diamondback Energy, Cimarex Energy and EOG Resources are all candidates, but the list of possible buyers is thinning.

Andrew Gillick, strategist at consultancy Enverus, said the market would only reward deals that “extend the runway” of drilling locations, maintain or lessen debt, and involve limited premiums.

“There are very few remaining companies in the shale patch that fit this bill, which suggests much more restructuring, as opposed to M&A, in future,” Mr Gillick said.

(Derek Brower and Myles McCormick)

Opec frets about the market again

Oil ministers gathered virtually on Monday against a backdrop of an uncertain market outlook, with investors and analysts keeping an eye out for signs that producers may delay a further easing of the supply cuts in place since May.

Opec delegates have signalled they favour pushing back a scheduled tapering due in the new year by a few months, but any such action would require Russia’s buy-in. While Moscow is part of the collective cuts deal, it is reluctant to lose market share to rivals.

Without giving much away, Saudi Arabia’s energy minister Prince Abdulaziz bin Salman sought to emphasise that come what may, producers will continue to work together to manage the market.

“We will not dodge our responsibilities,” he said as officials met to monitor the progress of the cuts deal. “We will do what is necessary.” Supply curbs of 9.7m barrels a day were agreed in April and have since been reduced to 7.7m b/d.

‘Make my day’: Saudi Arabia’s Prince Abdulaziz has vowed that Opec+ will continue to work together to manage the market © REUTERS

The pressure is building on producers to take further action, with the oil market’s recovery since the summer months having stalled.

The supply picture is in question too with new production set to come online from Libya. Other countries that have failed to meet their share of cuts have also not yet compensated fully for their overproduction.

“There is still some work to do,” said Prince Abdulaziz.

To add to the uncertainty, a presidential election in the US is just two weeks away, which could fundamentally alter how the country interacts with major producer nations — namely Saudi Arabia and Russia.

Russia may be reluctant to co-operate, but it knows the market is fragile. “Despite the [oil price] stability which we’re seeing today, it is clear that the market is much more volatile than it may seem,” said energy minister Alexander Novak.

Prince Abdulaziz had a parting shot for doubters — ahem . . . short-sellers — that might want to bet against producer countries. (Yes, we also remember the Saudi-led price war earlier this year.)

“It would be unwise indeed if anybody wants to gamble on our determination . . . Again, please make my day,” he said.

(Anjli Raval)

Data Drill

The cost of generating power from utility-scale solar has fallen a staggering 90 per cent since 2009, according to new analysis by investment bank Lazard.

The group’s latest Levelised Cost of Energy report, released this week, underlines the extent to which decreasing capital costs, improving tech and increased competition have sent the price tag of renewable power tumbling over the past decade. Wind generation has fallen 70 per cent.

“We just see a continued decline in the cost of renewable energy relative to conventional generation,” said George Bilicic, global head of power and energy at Lazard. “And so whether it’s an established, existing fossil fuel plant . . . or a new one, renewables are competitive.”

Line chart of $/MWh showing The cost of renewable power has plummeted in the past decade

Power Points


The energy transition is under way — at least as far as investors are concerned. A survey from BCG’s Center for Energy Impact of 150 oil and gas investors offers stark findings:

  • Just 26 per cent of respondents think oil and gas will gain a bigger share of their portfolio in the next decade.

  • Only 30 per cent think it remains more attractive an investment than renewables.

  • Almost 60 per cent feel pressure to cut fossil fuels from their portfolio.

  • Almost 90 per cent think clean energy is a way for oil and gas companies — from majors to midstream players — to position for long-term success.

  • Sixty-three per cent of investors surveyed thought companies should pursue ESG goals, even at the expense of lower earnings per share.

The souring on oil and gas isn’t because investors are bearish about the market: 77 per cent think demand will recover in 2021, 59 per cent think prices will be $40-50 a barrel in 2024 and 30 per cent think it will be even higher.

Rebecca Fitz, a senior director at the CEI, said it marked a warning for the oil sector.

“The shift to low carbon won’t happen overnight, but investors are strongly signalling support for greener portfolios, and scepticism for traditional oil and gas value creation models in the years ahead,” she said.

Energy Source is a twice-weekly energy newsletter from the Financial Times. Its editors are Derek Brower and Myles McCormick, with contributions from David Sheppard, Anjli Raval, Leslie Hook and Nathalie Thomas in London, and Gregory Meyer in New York.

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Hasty, imperfect ESG is not the path for business




The writer is a global economist. Her book ‘How Boards Work’ will be published in May

Good environmental, social and governance practices take a company from financial shareholder maximisation to multiple stakeholder optimisation: society, community, employees. But if done poorly, not only does ESG miss its sustainability goals, it can make things worse and let down the very stakeholders it should help.

To be sure, the ESG agenda should be pursued with determination. But there are a number of reasons why it threatens to create bad outcomes. The agenda is putting companies on the defensive. From boardrooms, I have seen organisations worry about meeting the demands of environmental and social justice activists, leading to risk aversion in allocating capital. Yet innovation is the most important tool to address many of the challenges of climate change, inequality and social discord.

Pursued by $45tn of investments, using the broadest classification, ESG is weighed down by inconsistent, blurry metrics. Investors and lobbyists use different evaluation standards and goals, which focus on varied issues such as CO2 emissions and diversity. Metrics also depend on business models.

Without a clear, unified compass, companies that measure themselves against today’s standards risk seeming off base once a more consistent regulator-led direction emerges (for example, from worker audits, the COP26 summit and the Paris Club lender nations).

ESG is not without cost and the best hope for long-term success lies with business leaders’ ability to stay attuned to its impact and unintended consequences. For example, while the case for diversity is incontrovertible, efforts at inclusion should account for the possible casualties of positive discrimination.

Furthermore, despite ESG advocates setting a strong and singular direction for governance, organisations have to maintain their operations and value while managing assets and people in a world where cultural and ethical values are far from universal. While laudable, a heightened focus on ethics (such as human rights, environmental concerns, gender and racial parity, data privacy and worker advocacy) places additional stress on global companies.

It is often asked if advocates appreciate that ESG is largely viewed from the west’s narrow and wealthy economic perspective. To be truly sustainable, ESG demands global solutions to global problems. Proposals need to be scalable, exportable and palatable to emerging countries like India and China, or no effort will truly move the needle.

Much of the agenda is too rigid, requires aggressive timelines and lacks the spirit of innovation to achieve long-term societal progress. Stakeholders’ interests differ, so ESG solutions must be nuanced, balanced and trade off speed of implementation against the breadth and depth of change.

Business leaders are aware of the need for greater focus and prioritisation of ESG. We also understand that deadlines can provide important levers for senior managers to spur their organisations into action. After all, in the face of pressure for a solution to the global pandemic, vaccines were produced in months instead of the usual 10 years.

I live at the crossroads of these tensions every day. Raised in Africa, I have lived in energy poverty, and seen how it continues to impede living standards globally. As a board member of a global energy company, I have seen much investment in the energy transition. Yet from my role with a university endowment, I have also been under pressure to divest from energy corporations. 

Business leaders must solve ESG concerns in ways that do not set corporations on a path to failure in the long term. They must have the boldness to adopt a flexible, measured and experimental agenda for lasting change. In this sense, they must push back against the politically led narrative that wants imperfect ESG changes at any cost.

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UAE’s Taqa seeks to shine with solar energy push




From a distance, the 3.4m panels making up the United Arab Emirates’ largest solar power plant look like a massive lake.

But Noor Abu Dhabi, nestled between camel farms and rolling sand dunes, is no mirage. The 1.2 gigawatt facility — the world’s largest single-site plant — produces enough electricity for around 90,000 homes. Owned by Taqa, an Abu Dhabi state-backed utility, with Japan’s Marubeni and China’s JinkoSolar, it will celebrate its second anniversary of operations this month.

Staff constantly scan for repairs so production can be maximised during daylight hours, while every evening more than 1,400 robotic cleaners wipe the dust from the banks of solar panels to boost efficiency.

Noor and another Taqa project — an even larger 2GW solar plant under construction in Al Dhafra, nearer the capital — are emblematic of the company’s ambitions to recast itself as a force in clean energy.

It has outlined a new sustainable strategy with a goal for renewables to form 30 per cent of its energy mix, compared with 5 per cent now, and plans to boost domestic power capacity from 18GW to 30GW by 2030. It will set itself a carbon emissions target later this year.

“We want to transform Taqa into a power and water low-carbon champion in and outside the United Arab Emirates,” said Jasim Husain Thabet, chief executive of the power provider, which is majority owned by government holding company ADQ and listed on the emirate’s bourse.

Renewable sources account for a small part of the UAE’s energy supply

Taqa’s push into renewables is a key element of the UAE’s ambition to have clean energy form half of its energy mix by 2050, with 44 per cent from sources such as wind and solar and 6 per cent from nuclear power.

Last year, the oil-rich emirate had 2.3GW of renewable energy capacity, or seven per cent of the power production mix, mainly from solar power, according to Rystad Energy, a research firm. It forecasts that the UAE is on track to reach its 44 per cent target by 2050.

Although many Gulf governments have targets to boost solar and wind power, the UAE has been out in front.

The Al Dhafra plant is expected to boast the world’s most competitive solar tariff when complete. The facility, a joint venture with UAE renewable pioneer Masdar, EDF and JinkoPower, plans to power 150,000 homes when it comes online next year, reducing the country’s carbon emissions by the equivalent of taking 720,000 cars off the road.

“This is about being a good citizen,” said Thabet. “But it is also attractive for global investors keen on environmental sustainability, it fits in with our main shareholder’s priorities and brings down financing costs.”

Yet Taqa’s sustainability pitch could fall flat with investors scrutinising environmental concerns.

Taqa has committed to capping production at its overseas oil and gas assets, which span fields in Canada, the North Sea and Iraqi Kurdistan. But although it has not ruled out selling the hydrocarbons assets that it bought during a spending spree in the 2000s, divestment is not imminent.

“If the right opportunity comes we will consider it, but right now our focus is on enhancing operations and reducing emissions,” Thabet said.

The UAE, a leading oil exporter and member of Opec, is also committed to increasing its crude oil capacity in the coming years. The country is working towards reducing greenhouse gas emissions, but still has one of the highest per capita carbon footprints in the world.

But Mohammed Atif, area manager for the Middle East and Africa at DNV, a renewables advisory firm, said the UAE, like other major oil and gas producers such as Norway and the UK, are working for a more sustainable future. 

“Yes, the roots and history of the UAE are grounded in hydrocarbons, but they are aware of the challenge of climate change,” he said. “It is a transition, not a revolution, and that takes time.”

US special presidential envoy for climate John Kerry: ‘There’s no reason why oil-producing countries cannot also be a key part of tackling the climate crisis’ © WAM/Handout via Reuters

John Kerry, the US special presidential envoy for climate, visited the Noor plant while attending a regional climate change dialogue in Abu Dhabi earlier this month, saying such “incredible energy projects” would “set us on the right path” to achieving the Paris Agreement goals that aim to limit global warming.

“There’s no reason why oil-producing countries cannot also be a key part of tackling the climate crisis,” he said in a tweet. 

At the same time, Taqa is eyeing opportunities to expand in renewables beyond the UAE. Last year it merged with Abu Dhabi Power Corporation, creating an integrated utility company with ADQ owning 98.6 per cent.

The government is expected to increase the free float via a share offering, Thabet said, declining to provide further details.

With exclusive rights to participate in power projects in Abu Dhabi over the next decade, the company is now mulling how to leverage that guaranteed cash flow abroad.

Thabet said the company would focus on projects and investments that burnish its sustainable credentials. It wants to build 15GW of power capacity outside the UAE. The group currently produces 5GW internationally, including 2GW in Morocco.

“We believe in solar and [photovoltaic] projects, so we will focus on that — but if there is an opportunity outside the UAE, such as onshore or offshore wind, then we will explore that,” he said. Taqa would also consider investing in international renewables platforms to reach its targets, he added.

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Chinese regulators fine Alibaba record $2.8bn




Chinese regulators have fined Alibaba a record Rmb18.2bn after finding that the ecommerce group had abused its market dominance.

The $2.8bn penalty, which was set at 4 per cent of Alibaba’s 2019 revenues, concludes an antitrust investigation into the company founded by Jack Ma. It comes as Chinese authorities have stepped up scrutiny on dealmaking and anti-competitive practices in its once lightly regulated technology sector.

The market regulator said that since 2015 Alibaba had forced merchants to sell exclusively on its Tmall and Taobao online shopping platforms.

Alibaba used its “market position, platform rules and data, and algorithmic methods” to put in place rewards and punishments for its “choose one of two” policy, the regulator said on Saturday.

In November, Chinese authorities suspended the $37bn initial public offering of Ma’s Ant Group, Alibaba’s payments and lending sister company, at the last minute.

Previously, the country’s competition regulators had focused mostly on traditional industries at home and on foreign companies. It imposed a then-record fine of $975m in 2015 on US chip-design group Qualcomm, which equalled 8 per cent of its China revenues. By law, China’s antitrust fines can be set as high as 10 per cent.

But last November, regulators started drawing up the first antitrust measures to cover the online platforms that have become China’s most valuable companies.

The State Administration of Market Regulation ordered Alibaba to “carry out a comprehensive rectification” drive on its platform, to strengthen its legal controls and compliance. It gave Alibaba 15 days to submit a report detailing changes to its “illegal behaviour”.

Alibaba said it “sincerely accepted” the penalty.

“It is an important action to safeguard fair market competition and quality development of internet platform economies,” the company said. “It reflects the regulators’ thoughtful and normative expectations.”

Alibaba added that it would strengthen compliance, improve its systems and ensure an open and equitable operating environment for its merchants.

Analysts said the fine alone would not significantly affect Alibaba’s operations. It had $48bn of cash on its balance sheet at the end of 2020 and earned $24bn in net profit last year.

The more significant part of the penalty, said Li Chengdong, chief executive of Dolphin Think Tank, was the fact that Alibaba had been found guilty of serious abuses, meaning it would be more likely to yield in future regulatory disputes over tax and counterfeit goods.

“Whereas Alibaba used to have a strong, assertive stance with regulators, now it will be on the back foot,” said Li.

Chen Lin, assistant professor of marketing at China-Europe International Business School, noted that the antitrust case had been “settled through money without really changing its monopolistic position”. Much as in the EU and US, there was little consensus over how Chinese regulators would break up huge companies like Alibaba.

Robin Zhu of Bernstein Research said that while the market may read the fine as the “worst is over” moment for Alibaba’s shares, the longer-term and larger issue was growing competition in ecommerce.

Alibaba’s biggest challenge comes from fast growing rivals. Upstart Pinduoduo overtook its annual shopper count last year, with 788m people buying on its platform ahead of Alibaba’s 779m. 

A Chinese antitrust lawyer, who asked to remain anonymous, said the fine “was meant to teach Alibaba ‘don’t think you can do whatever you want’, but [would] not materially harm the business”.

He noted the penalty was not as large as it could have been and was limited to Alibaba’s ecommerce operations, rather than its other industry-spanning operations.

Alibaba has in recent years bought up everything from supermarket chains to home furnishing retailers, giving it a share of about one-fifth of China’s total retail sales.

Food delivery group Meituan has taken market share from Alibaba’s and is pushing into ferrying all types of goods from shops to consumers — another challenge to Alibaba’s ecommerce dominance.

While the penalty marks the end of the government’s antitrust scrutiny of Alibaba, Ma’s other interests remain under pressure. Authorities have yet to announce formally a deal for Ant’s restructuring and have suspended new enrolment at Ma’s elite business school.

The Communist party’s People’s Daily newspaper said the punishment reflected a “normative correction for the company’s development, a clean-up and purification of the industry environment, and a strong defence of fair competition”.

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