Supply rising, demand falling, storage filling, prices crashing, coronavirus advancing, economies collapsing, future plans unraveling.

Anxiety levels soaring? Sure, everywhere but in the (virtual) board rooms and (at-home) executive offices of the oil and gas industry.

“I don’t need to calm anybody down,” Hillary Holmes, partner in the Houston office of Gibson, Dunn & Crutcher LLP, told “Remember in the industry we’re in, we’ve seen oversupply, we’ve seen decline in demand, we’ve dealt with hurricanes and explosions and other high-risk situations. We are a careful, thoughtful, adaptive industry. While this is a challenging situation, these experienced management teams and thoughtful boards are calm as they evaluate what steps to take next.”

Cliff Vrielink, co-managing partner of Sidley Austin LLP’s Houston office, also admires the resiliency of people in the oil business.

“People are optimistic, people look for the opportunities and challenges,” Vrielink said. “Without a doubt, everybody thinks we’re in a really tough spot and it’s not going to change overnight. Everybody knows that if you can survive there will be opportunity on the other side, or if you have capital there will be opportunities along the way. I have not really heard anybody at this point bemoaning extensively where they are because, frankly, people think there’s too much wood to chop. You have too much that has to be done.”

Losing Talent

Where the stress plays out is in cutting staff.

“That’s a hard choice to have to make, especially as we head into a difficult economy,” Holmes said. “They think very carefully about that. Those aren’t cavalier decisions.”

And there are strategic implications to consider.

“Everybody hates to lose good talent,” Vrielink said. “But if you're trying to keep the enterprise afloat, then maybe sacrificing some of those capabilities is the right thing to do.”

Expertise is particularly important in the oil and gas industry, which contributes to management hesitation in reducing the workforce, he said.

“But a lot of people have to do that,” Vrielink said. “So it’s going to be an unpleasant fact that a lot of people are going to have to take care of.”

Problems Pile Up

An industry with a history as long as oil and gas tends to fall back on lessons learned in previous episodes, but how does it respond to the combination of a historic drop in demand and historic increase in supply?

“We’re used to having one at a time but not both,” Michael P. Darden, partner-in-charge of Gibson Dunn’s Houston office and chair of the firm’s oil and gas practice group, told “When I say we’re used to it, we know how to deal with it in various other cycles.”

“We’ve got an oversupply of production coupled with an unprecedented decrease in demand that is caused by something that’s totally uncertain to everyone, which is this virus and the effect it’s had on national economies and now the world economy,” Darden said.

Add strained storage capacity to transportation and low price issues bedeviling the industry. Fending off these challenges has led to aggressive cuts in capex as well as opex, meaning that wells must be taken offline.

“Of course, that’s got to happen,” Darden said. “People know that’s the end result for producersnot to produce at this point. But you’re going to have a lot of issues that result from that.”

All of which is manageable provided a company’s leaders can anticipate how the crisis will play out, which they obviously cannot. When will the COVID-19 crisis abate? When will economies start back up? How much oil demand will there be?

“There’s some fear that it won’t return to pre-crisis levels anyway,” Darden said. “But it’s this lack of certainty of what the future’s going to look like that makes people a little less confident when they compare it to what’s happened in the past.”

Misery Loves its M&A

Holmes divided corporate responses into three approaches: hunkering down and waiting it out; preparing for a restructuring or Chapter 11 bankruptcy filing, including the pursuit of refinancing options; and M&A, either to consolidate as a way to survive or, for the financially sound, to take advantage of another company’s dire situation. For the third, targets of unwanted suitors are busy setting up defensive measures, she said.

“You’re going to see more activist activity and unlikely deals you wouldn’t have predicted two months ago,” Holmes said. “We’ve seen deals between two companies that we know they looked at six months ago and passed on but now, under these conditions, make sense.”

Typically, a cash component is favored to get a consolidation deal over the finish line but not in these strange times.

“In this environment, I don’t think people are going to hold out for the best deal,” Vrielink said. “I think a lot of people are just going to look to do a deal that gives them breathing room for another day.”

That could mean two struggling companies attempting to join forces. The impetus could come from either the investor or management perspectives, but Vrielink expects an acceleration in this type of activity. Historically, a lot of consolidation plays involved private companies owned by private equity. Two sponsors might both have companies in the same basin, but the deal would fall through because they differed in the valuation of their respective companies.

“But if oil prices are $30, all of a sudden you may not be arguing about whose company is worth more,” Vrielink said. “If they’re both at breakeven or both struggling then you’re not fighting about who gets a bigger piece of the pie, you’re just trying to keep the boat afloat.”