The oil industry is experiencing a wave of deal making, and it seems that there will be more to come in 2024.
Merger Mania in Q4 2023
In the fourth quarter of last year, Exxon Mobil made headlines by acquiring Pioneer Natural Resources for a staggering $60 billion. Following suit, Chevron swiftly scooped up Hess in a deal valued at $53 billion. Occidental Petroleum didn’t want to be left behind and recently announced its plans to buy West Texas producer CrownRock in an $11 billion deal.
A Continuing Trend
As they say, three times is a trend, and Wall Street predicts that this trend is far from over. The fear of missing out, or FOMO, is a real motivator in the industry. According to Kevin Costantino, co-head of investment bank Greenhill, “One big deal happens and guess what, everybody feels like they have to do one.”
Focus on the Permian Basin
Drillers are eyeing the Permian Basin, which spans across West Texas and southeastern New Mexico. This oil-rich region has become a prime target for buyers looking to replenish declining inventories. Other attractive assets include the Eagle Ford Shale in Texas and the Bakken formation, which stretches across Montana, North Dakota, and parts of Canada.
Consolidation beyond Upstream Companies
It’s not just the explorers, known as upstream companies, who are merging. As consolidation takes place at the top, midstream players involved in oil transportation and downstream refiners are also likely to join forces. Kevin Costantino explains, “With all those big deals that happen at the top, that all cycles through the entire system from midstream on down.”
In summary, the oil patch is currently experiencing a surge of deal making, with more expected in 2024. The Permian Basin and other prime assets are attracting buyers as they aim to overcome declining inventories. The effects of consolidation at the top will be felt throughout the industry, impacting midstream players and downstream refiners.
Explorers Target Smaller Drillers to Maintain Dominance
A Shift in the Energy Industry
According to Neal Dingmann, an analyst at Truist Securities, explorers in the energy industry are facing a challenge to maintain their dominance as inventories are expected to be under pressure. As the supply and demand equation becomes mismatched, larger players with the ability to buy inventory are now targeting smaller drillers who lack the scale to be productive with only one or two rigs in operation.
Potential Acquirers and Attractive Targets
Dingmann highlights several potential acquirers in this shifting landscape, including Devon Energy, Diamondback Energy, and Marathon Oil. All of these companies are rated as “Buy” by Dingmann. Additionally, there are still ample targets available for acquisition, although they may not be as large-scale as the megadeals announced earlier this year. Permian Resources, Southwestern Energy, and Civitas Resources are among the potential acquirees identified by Dingmann, each of which has a market cap below $10 billion.
The Race for Quality Resources
The urgency to gain control over the best quality resources is driving these acquisition efforts. Matt Bernstein, a senior analyst at Rystad Energy, emphasizes that there are still many years left for production, and everyone wants a piece of the pie.
A New Approach to Consolidation
Unlike previous eras of consolidation in the industry that led to high debt burdens and subsequent bankruptcies in 2016, explorers are now demonstrating more discipline in their acquisitions. Companies like Exxon and Chevron plan to complete their acquisitions through all-stock transactions, avoiding the need to tap into debt markets. This precautionary approach aims to prevent a repeat of past financial crises.