Global oil demand will recover to pre-pandemic levels as soon as late 2022, but Pioneer Natural Resources CEO Scott Sheffield said many oil and gas independents won’t be around to see it.

“There are probably going to be very few investable oil and gas independents at the end of the day,” Sheffield said Dec. 1 at the Reuters Future of Oil & Gas 2020 virtual conference. That’s because oil and gas independents account for a minuscule percentage of companies on the S&P 500 index, and of those, shareholders typically focus on only two or three.

Survival for many will require consolidation, of which five major deals have been announced in the past several months. Among them was Pioneer’s takeover of Parsley Energy.

“We’re excited about our Parsley acquisition, which we expect to close in the first quarter,” he said. “It will make Pioneer the largest pure-play independent in the Permian that’s public.”

Recent major deals include:

A consolidation like Devon Energy Corp. and WPX Energy Inc. creates a single entity with an enterprise value of almost $10 billion, Sheffield said.

“As they de-lever and other companies reduce their leverage, I think you’ll see a lot more consolidation over the next two or three years and you may end up then with very, very strong independents,” he said. “You’ll have two or three in the Permian, two or three in the Bakken, and two or three in the Marcellus.”

Rebound on the Way

Sheffield, who started working in the oil patch during the Ford administration, called 2020 “the most interesting year in my entire career.” But despite the damage endured by the industry from the pandemic and the Saudi-Russian price war earlier this year, he sees a recovery on the horizon. Once a vaccine can be distributed, travel will pick up and spur demand for fuel, especially jet fuel.

“I’m more optimistic that the airline industry will come back sooner than later and we’ll get back up to 100 million barrels a day [MMbbl/d] of demand in the world,” Sheffield said. “I still expect maybe ’22, maybe ’23 we’ll get back to 100 MMbbl/d. I think people have felt cooped up. They want to get out, they want to travel and people are ready for that vaccine.”

His confidence is bolstered by the Brent strip for 2021, which has received a, well, shot in the arm from recent announcements concerning COVID-19 vaccines. The price for Brent, the international oil benchmark, was $37.94/bbl at the end of October. By the end of November, the price had jumped to $47.59/bbl, or an increase of 25.4%. The futures prices for 2021 were above $47/bbl for the entire year on Dec. 2.

“The more confident we get in the Brent strip for 2021 and moving forward to be above $45, [Pioneer] will start growing at about 5% a year and we’ll have a good base dividend of about 2.5% and a variable dividend of about 3%,” Sheffield said.

Like companies throughout the oil and gas industry and the economy at large, Pioneer was forced to cut its workforce this year. It has also found ways to reduce overhead costs by about $2/boe. Going forward, he expects the company to establish policies allowing some employees to work from home and reduce Irving, Texas-based Pioneer’s need for office space.

The oil and gas industry will need to slow its pace of growth, Sheffield said. For the near term, at least, average additions of 1 MMbbl/d per year will have to wait. And that’s not such a bad thing.

“Eventually, the market’s going to get tight because we’re spending a lot less capital in the U.S., we’re spending a lot less capital on exploration worldwide and we’re probably going to go into a much tighter market in 2023-2025,” he said. “I think return on capital employed is going to be higher for the industry. The key is, we have to gain trust back with the investors and it’s going to take a good two years to do that.”