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Leonard Hyman & William Tilles

Leonard Hyman & William Tilles

Leonard S. Hyman is an economist and financial analyst specializing in the energy sector. He headed utility equity research at a major brokerage house and…

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Big Oil Investors May Not Win From M&A Streak

  • The 10-year report card shows that S&P Oil investors have made a very meagre total return.
  • Some academic studies assert that maybe 60% of acquisitions of assets by corporations do not earn their cost of capital.
  • Based on historical evidence and our own experience, the seller of the oil property and the Wall Street investment bankers usually turn out to be the biggest winners in M&A.
Offshore rig

The International Energy Agency (IEA) predicts that fossil fuel consumption will peak within a decade. But ExxonMobil and Chevron, the American oil giants just announced two gigantic acquisitions of oil and gas properties. They put their money where their mouths are. They are doubling down on oil and gas. So what does the IEA know?    Before we get into the specifics of our suspicions, let’s set out a ten-year report card for the oil companies. They are entities supposedly established as businesses with the intent to make profits for their shareholders. Successful firms earn returns commensurate with or in excess of the risk undertaken. Shareholders do not measure returns based on what the corporate books show. They measure it based on the total of dividends and stock price appreciation. So, let’s look at the annual price appreciation and the total returns (price plus dividend) for the 10 years ended October 30, for five S&P 500 industry sectors (in %).   



price appreciation

Total return per year 


S&P 500 (total market)



S&P utilities



S&P clean energy



S&P energy



S&P oil




To translate, the oil investor made all the money from dividends and would have been better off if the oil companies had either invested in other lines of business or just paid out all cash to shareholders. Those oil companies demonstrated that they were better at drilling holes in the ground than at extracting a commensurate return from those holes. That is not impressive financial management and not the sort of record that should give one confidence. It’s called value destruction in Wall Street parlance.

Related: Chevron Negotiates 15-Year LNG Supply Deals With European Buyers


Now to the specifics of the doubling down. Or doubling up on the bets on oil by two firms that don’t pretend that they have much interest in anything beyond offering fossil fuels for people to burn. ExxonMobil started the action when it announced that it would take over Pioneer, a leader in shale, for $60 billion, and the combined firm would become the biggest in the Permian basin.“ New era in shale… turbocharge consolidation… pump more efficiently…” said the commentariat. No mention of ExxonMobil’s last big shale acquisition in 2009, that of XTO for $41 billion (which is $56 billion in 2023 dollars, incidentally), which was a disaster for ExxonMobil. Apparently, the XTO management had a better handle on the direction of the shale business than ExxonMobil. ExxonMobil’s then chief executive admitted something like this, “Maybe we paid too much..” His statement was true without the “maybe.” 

Shortly after the Pioneer announcement, Chevon pounced, offering $53 billion for Hess, another company that had ventured into areas the big majors eschewed. More rapturous headlines: “oil arms race… bet on future demand.,,, biggest oil discovery of the past decade…” The bankers and analysts predicted a new wave of mergers, as oil companies rushed to jump aboard before the train left the station.  

As for justification, one CEO said that demand for oil would continue to rise for decades and a Saudi prince said that nobody would buy those properties if they thought demand for oil would decline. Duh? History tells us that businesses do make multibillion dollar deals that they regret, so why does the fact that the acquiring company thinks it is a good deal make it a good deal? Take a look at the Bayer purchase of Monsanto as one example.  

However, we don’t want to discuss geology or oil demand here but rather finances. Sensible people invest money when the potential return on the investment equals or exceeds a return proportional to the risk taken, known as the cost of capital. That is, if the investment should bring in a 10% return, $100 invested should bring in $10 a year. If it only brings in $8, the market value of the investment will fall to $80. To put it another way, if you pay $100 for an investment that should earn 10% but only brings in $8 per year, then you overpaid by $20. That’s why the stock of the buyer so often falls upon its announcing a merger. 

Some academic studies assert that maybe 60% of acquisitions of assets by corporations do not earn their cost of capital. They make a profit, just not enough of a profit. That’s another way of saying that corporate buyers pay more than they should 60% of the time. And the more they talk about the strategic value of the acquisition or its transformational nature, the greater the likelihood they will pay too much. When we were on Wall Street, the word “strategic” generally meant that the numbers did not work, but the boss wanted to do it, and nobody on his staff dared to tell him not to. And investment bankers certainly wouldn’t disagree because they would earn a fee only if a transaction took place. And the bigger the transaction, the bigger the fees.

So, where does this lead? We expect corporate leaders in the oil business, taking cues from bankers, to start saying things like “kill or become roadkill” at internal meetings. We expect they will cook up optimistic calculations of synergies and to rush into buying properties because others are doing so, and if the other guy is doing it, it must be a good idea. CEOs like to run in herds. That will push up prices for properties. This will lead to fewer companies in the oil business but not any more oil. Given that shale is a capital-intensive business, paying up for properties when interest rates are high will just increase the risk undertaken by the buyers, and increase the financial stresses if demand for oil goes in the wrong direction — that is, increase the risk of failure. But we are not making predictions about success or failure. We just want to determine the clear winners in this game. And that is easy.   

And who comes out winners? Based on historical evidence and our own experience, the seller of the property and the Wall Street investment bankers. 

By Leonard Hyman and William Tilles for Oilprice.com

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