In just two months, three of the biggest U.S. oil companies announced major acquisitions valued at a total of $135 billion. Industry executives and analysts expect the consolidation drive in the oil and gas sector to continue amid high stock values and the desire of many firms to get their hands on more inventory for production in the top shale basin, the Permian.
The Permian saw a surge in mergers and acquisitions this year, with the total value already exceeding a record $100 billion, according to energy consultancy Wood Mackenzie, as large operators look to add more acreage and expand their reserves and production.
The latter part of this year saw the biggest deals in the U.S. oil and gas industry and the largest such acquisitions for years. Most were stock transactions in which the supermajors took advantage of their high share prices to propose friendly all-stock deals to smaller rivals.
In October, Exxon announced a deal to buy Pioneer Natural Resources in an all-stock transaction valued at $59.5 billion. The implied total enterprise value of the transaction, including net debt, is approximately $64.5 billion.
Exxon said back then that the proposed transaction “transforms ExxonMobil’s upstream portfolio, more than doubling the company’s Permian footprint and creating an industry-leading, high-quality, high-return undeveloped U.S. unconventional inventory position.”
Weeks later, Chevron said it would buy Hess Corporation in an all-stock transaction valued at $53 billion with a total enterprise value, including debt, at $60 billion.
The frenetic deal-making this year also included Permian Resources buying Earthstone Energy in an all-stock deal valued at $4.5 billion, which is expected to create a $14-billion premier producer in the Delaware basin in the Permian.
The latest announced deal was Occidental Petroleum’s acquisition of Permian oil and gas producer CrownRock for cash and stock in a deal valued at around $12 billion, including debt. Related: Petrobras Returns to Africa with Shell Asset Acquisition
The acquisition will boost Occidental’s premier Permian portfolio with the addition of around 170,000 barrels of oil equivalent per day (boed) of high-margin, lower-decline unconventional production in 2024, as well as approximately 1,700 undeveloped locations, Oxy said.
The three deals by Exxon, Chevron, and Occidental alone are valued at over $135 billion.
All three companies plan to increase their oil and gas production in the Permian, which still holds the biggest undeveloped quality inventory of resources, analysts say.
Chevron and Exxon have already announced capital budgets for 2024 focusing on the Permian. Exxon expects its oil and gas production to be about 3.8 million oil-equivalent barrels per day in 2024, rising to about 4.2 million oil-equivalent barrels per day by 2027, driven by growth in the Permian and Guyana.
Chevron’s $14 billion upstream investments in 2024 will include $5 billion that will go towards developments in the Permian.
Consolidation To Continue
“The Permian is uniquely positioned among U.S. shale plays as having both the most remaining high-quality inventory and the greatest opportunity for resource expansion,” Andrew Dittmar, senior vice president at Enverus Intelligence Research (EIR), said in October, commenting on the Q3 merger activity and the blockbuster deals announced at the start of the fourth quarter.
“The outlook for shale is bright from here and M&A will be robust as companies want to secure their piece of that future.”
Companies with exposure to the Permian will be the most attractive acquisition targets going forward, according to Dittmar.
Industry executives of companies active in the Permian expect more large-size deals to be announced in the near term, according to the Dallas Fed Energy Survey.
Of the 122 executives responding to a question in the survey, 77% said they expect more acquisitions of $50 billion or more to occur in the next two years.
While the acquisition spree is helping large exploration and production firms, it’s not necessarily good news for oilfield service providers.
“The consolidation of operators will impede the growth and sustainability of the oilfield service sector,” one executive at a service firm wrote in comments to the Dallas Fed survey.
“This will lead to the demise of small independent oil and gas operators, as they will be unable to obtain reasonable pricing from the few remaining service providers.”
Yet the large E&P companies in Texas and southern New Mexico, home to the Permian basin, expect to continue buying assets and resource inventories, the survey found. Asked about their firm’s primary goal for 2024, the most-selected response among large firms was “acquire assets” (35% of respondents) followed by “reduce debt” (20% of respondents).
This M&A spree is not opportunistic as the industry is in an upcycle while investors value scale, analysts at Wood Mackenzie said after Exxon and Chevron announced their respective acquisitions.
Moreover, the major oil firms are mostly agreeing to all-stock or cash-and-stock mergers, which leaves them with enough cash to follow through with their capital expenditure plans in the near to medium term without taking on additional debt.
“The stock market re-rating over the last two years rewarded ExxonMobil and Chevron with premium-rated equity currency to fund all-stock acquisitions – a less risky proposition in volatile commodity markets than leveraging the balance sheet,” WoodMac’s analysts say.
“These were friendly takeovers of companies trading near all-time highs.”
By Tsvetana Paraskova for Oilprice.com
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