What is Driving the New Mega-Deals in the U.S. Oil & Gas Sector?

     Jim Cramer says the recent oil & gas mega-mergers signal a bull market in the industry. Others have said oil is entering a new supercycle and others yet have said the big new M&A deals show that the sector is healthy and in good shape. Another headline suggested the big mergers were sending mixed signals to U.S. Midstream companies as to whether drilling and production would increase. The Permian Basin is king and that is where most of the action is. The 30th annual Executive Oil Conference’s Agenda Introduction puts it in perspective like this:

“Producing more than 5.7 MMbbl/d, the Permian Basin is the world’s most productive oil field, far exceeding that of Saudi Arabia’s Ghawar in daily output, making the U.S. the world’s largest oil producer again.”

“The basin is also surfacing more than 22 Bcf/d of associated gas that’s increasingly supplying LNG exporters on the Gulf Coast and, soon, to exporters on Mexico’s west coast.”

“And more formations remain untapped, resulting in hundreds of thousands of additional wells that are probable and possible in addition to the tens of thousands currently PDP and PUD.”

“As midstream operators continue to add more pipe capacity, operators continue to increase ROI and EUR with ongoing innovation in lateral placements and completions.”

“And all the while, basin leaders are further solving for emissions.”

     One focus of the M&A activity is building up quality inventory. Several mergers and bolt-on acquisitions announced in mid-2023 in the Eagle Ford, Austin Chalk, and Permian were focused on building inventory and expanding existing acreage. (A couple of those deals were partially responsible for me getting laid off from my last job). Another possible focus, perhaps a secondary or fringe benefit, is increasing the likelihood of increases in emissions reduction as some have suggested. This depends on the decarbonization portfolios of each company.

 

Exxon-Pioneer $60 Billion Merger

     The Exxon-Pioneer deal merges two of the biggest Permian Basin positions - Exxon’s large position in the Delaware Basin and Pioneer’s huge position in the Midland Basin as the graph below shows.

 

     Exxon’s press release about the deal notes: “Combining Pioneer’s differentiated Permian inventory and basin knowledge with ExxonMobil’s proprietary technologies, financial resources, and industry-leading project development is expected to generate double-digit returns by recovering more resource, more efficiently and with a lower environmental impact.” They note that Pioneer’s contiguous acreage is well situated for long laterals. They hope to leverage automation and digitalization on a wider scale. They also plan to increase the amount of recycled frac water, decrease methane emissions, and accelerate decarbonization of the assets.

 

Chevron-Hess $53 Billion Merger

     The Chevron-Hess deal is likely about diversifying Chevron’s portfolio and production growth. Chevron extends its U.S. shale portfolio from the Permian and DJ Basins into the Bakken. The Permian is not the only hot M&A basin. Chevron’s merger with Hess brings in Hess’s strength in the Bakken and offshore Guyana. The Chevron-Hess deal is likely about diversifying Chevron’s portfolio and production growth. Chevron extends their U.S. shale portfolio from the Permian and DJ Basins into the Bakken, where Hess also has a Midstream presence. Getting Hess’s 30% of the offshore Guyana block with more than 11 billion barrels of oil equivalent discovered recoverable resource, means production growth. “The Stabroek block in Guyana is an extraordinary asset with industry leading cash margins and low carbon intensity that is expected to deliver production growth into the next decade.” Hess CEO John Hess, who is expected to join Chevron’s Board of Directors, called it “the world’s largest oil discovery in the last 10 years.”

 

Possible Chesapeake-Southwestern Gas Heavy Deal

     Reports are that Chesapeake is in talks to purchase Southwestern. Both are major gas producers in the Appalachian Basin Marcellus and Utica plays. In the past Chesapeake sold some of its assets and acreage to Southwestern. Chesapeake also just emerged from bankruptcy in 2021. If the deal goes through it would make Chesapeake the largest U.S. natural gas producer, overtaking EQT. While I don’t know exactly how bankruptcies work, I wonder what those who were possibly not paid fully by Chesapeake for their services think about their possible newfound success and ranking. I have had that experience of not being paid fully by those well able to do so.  

 

Big Trans-Atlantic Deals Less Likely for Several Reasons

     After the Exxon and Chevron deals, speculation that either one of them would buy BP or Shell has receded. This is especially true as the U.S. majors have outperformed their European-based rivals. The U.S. majors focused less on the marginal returns from renewables and more on high-returning oil and gas in the record profit year of 2022. Investors punished the Euro-majors for their pivot toward renewables. BP is thought by some to be trading at an “exaggerated discount” and ripe for getting bought out. The sudden departure of CEO Bernard Looney is thought to odd to the takeover risk. Certainly, Exxon and Chevron would not be interested in BP and Shells’ renewables assets. While Shell (mkt cap $220 billion) and BP (mkt cap $113 billion) probably have less in the way of potentially stranded assets, Chevron (mkt cap $318 billion) and Exxon (mkt cap $440 billion) are apparently not so worried about stranded assets. Longer term projects are most exposed as potential stranded asset liabilities. Predictions of peak oil demand and peak gas demand vary quite a bit depending on who is doing the evaluation. The near-term peaks predicted by the IEA and others are considered by many to be more aspirational than realistic. These peaks are also dependent on how successful CCS and other decarbonization solutions are in the next 5-10 years. If a big enough chunk of oil & gas emissions can be abated then stranded asset concerns could ease a bit.    

 

Growth Vs. Consolidation

     I noted that Permian Midstream companies are not sure if the Exxon-Pioneer deal means more drilling and production or not. Mega-deals in the past were focused on production growth but that may not be the case today. One possible indicator is stock premiums in the deals. Bloomberg reports: “The North American energy sector has seen $270 billion worth of M&A deals year-to-date, with the average share premium at a 25-year low of just above 9%, according to data compiled by Bloomberg. Between 1998 and 2022, the average premium was about 26.5%.” Thus, shareholders are not being rewarded as much. However, many benefited in the past year with record profits spurring big stock buybacks and the industry has also cut down its borrowing in recent years. Buybacks can help companies preserve capital for things like acquisitions. Javier Blas, in a Bloomberg opinion piece, suggested companies were futureproofing. As noted, the Chevron-Hess deal is about production growth, especially in the Guyana asset. It should be noted that Exxon too will lead in that growth as it owns 35% of the Stabroek block and other blocks offshore Guyana. The U.S. shale parts of these deals may not be so much about growth but more focused on inventory and consolidation benefits. 

     I recently read that Occidental Petroleum was quite happy with its purchase of Anadarko in 2019 so it appears they increased their Permian inventory before it was cool and remain pleased about it four years later.  

 

Benefits and Downsides of Consolidation in the Industry

     We all know that there are winners and losers in mergers & acquisitions, regardless of the goals. High-level executives often win big – the Hess family was said to get $5 billion. I doubt that but surely, they profited heavily. Consolidation also means some employees and contractors lose out, although sometimes they benefit from more opportunities, especially if a bigger company buys a smaller one. I benefited in that way once but more recently have lost out. While these Big Oil companies ramble on about free cash flow, stock premiums, and dividend increases, I just lament that I don’t have a job and have had to cash a big chunk of my own stock and retirement to make ends meet. I wonder if the Hess’s can spare a dime or two.

 

References:

Executive Oil Conference. Agenda. Executive Oil Conference 2023 | Hart Energy

Oil Megadeals Are Back. The Premiums Are Not. Javier Blas. Bloomberg. October 23, 2023. Chevron Buys Hess for $53 Billion as Oil Mega-Deals Are Back - Bloomberg

ExxonMobil announces merger with Pioneer Natural Resources in an all-stock transaction. Exxon Mobil. Press Release. October 11, 2023. ExxonMobil announces merger with Pioneer Natural Resources in an all-stock transaction

chevron announces agreement to acquire hess. Chevron. Press Release. October 23, 2023. Chevron Announces Agreement to Acquire Hess — Chevron

Guyana’s Oil Industry Is In For A Stellar Year. Matthew Smith. Oilprice.com. January 24, 2023. Guyana’s Oil Industry Is In For A Stellar Year | OilPrice.com

Chesapeake in preliminary talks to acquire Southwestern Energy. GlobalData. October 18, 2023. Chesapeake in preliminary talks to acquire Southwestern Energy (msn.com)

Mega transatlantic oil mergers less likely after Exxon, Chevron deals. Reuters. October 23, 2023. Mega transatlantic oil mergers less likely after Exxon, Chevron deals | Reuters