The oil giant has held preliminary talks with Pioneer Natural Resources Co. PXD 5.79% , a Texas fracker with a roughly $52 billion market capitalization, about a potential acquisition, The Wall Street Journal reported last week. Exxon, which has been on the prowl in the Permian Basin for months, has also discussed a potential deal with at least one other company, the Journal reported.
Such a transaction would send the strongest signal yet that drillers in the Permian, the hottest U.S. oil field, are set to bulk up through acquisitions. Oil companies boast healthy balance sheets that give them the stomach and means to shop for targets.
The Journal reported there is no formal process between Exxon and Pioneer, and any deal, if it happens, likely wouldn’t come together until later this year or next year. On Monday, the first day of trading since the Journal’s story, Exxon’s stock dropped less than 1% while Pioneer’s stock jumped about 6%.
The shale industry has shifted from the rapid growth it pursued for more than a decade to a mature business underpinned by fiscal restraint and hefty investor payouts. But shale companies are contending with dwindling drilling locations. Drilling for new oil discoveries has fallen out of favor with investors, leaving many companies with few options other than to acquire rivals to extend their runway.
“We think generally, there’s more consolidation that’s needed in our business,” ConocoPhillips Chief Executive Ryan Lance told analysts in February.
Wall Street plowed money into several American frackers on Monday, including APA Corp. , Coterra Energy Inc. and Diamondback Energy Inc., adding $7 billion to the collective market value of the 20 largest independent U.S. oil-and-gas companies. Shale stocks climbed even though oil prices declined about 1% Monday because investors were largely betting on an increase in oil mergers and acquisitions, said Neal Dingmann, an analyst at Truist Securities.
Thirst for growth led to a mergers-and-acquisitions boom in U.S. shale in the past decade. Between 2014 and 2019, the sector saw an average of 407 deals—not restricted to M&A—each year, with a total annual value averaging about $90 billion, according to investment bank Mizuho Securities.
But the pace of M&A slowed down after the pandemic gutted oil demand and stung companies’ balance sheets. Drillers also tightened their belts to meet investors’ demands for cash returns. There were, on average, 180 deals a year between 2020 and 2022 for $59 billion a year, according to Mizuho.
Now, producers have deep coffers at their disposal to pursue deals. Russia’s invasion of Ukraine last year sent global prices soaring to more than $127 a barrel, translating into windfall profits for oil and gas.
The 10 largest U.S. publicly traded shale companies as of the end of last year earned more than $70 billion in profits in 2022, according to FactSet. Exxon netted $55.7 billion in profits, while Chevron Corp. raked in $35.5 billion.
The next wave of oil deal-making is likely to be set in the Permian Basin of West Texas and New Mexico, say energy analysts and executives. Oil giants such as Exxon and Chevron favor the region for shale wells that produce rapidly and don’t bind the companies to decadeslong megaprojects that have fallen out of favor with some investors who fear a future decline in oil demand.
If an oil major such as Exxon or Chevron snapped up a big Permian company, “that could obviously ignite a speculative boom,” said Adam Rozencwajg, a managing partner at investment firm Goehring & Rozencwajg.
Exxon has invested heavily in the Permian over the past decade, and continues to call it a key source of growth, alongside its massive oil discoveries in Guyana. The company produced about 550,000 barrels a day on average last year in the Permian, and said it plans to increase its output there to 1 million barrels a day by 2027.
But as the region matures, firms have been wrestling with disappointing wells. The average Permian well produced 5% less oil per lateral foot in 2022 compared with the previous year, according to research firm Enverus. In one part of the Permian, Exxon’s 2022-vintage wells were 8.4% less productive than the prior year, according to Enverus data analyzed by JPMorgan Chase.
In addition to less-productive wells, operators are contending with shrinking inventories of drilling locations. Public companies and private operators in the Permian have less than eight years of their best locations remaining, investment bank Raymond James Financial estimated last year.
The double whammy creates incentives for companies to merge to gain new drilling opportunities and create economies of scale, executives and investors said.
Also whetting producers’ appetite for deals is inflation, which has blunted companies’ deployment of capital. The price of labor, steel and equipment has shot up, prompting companies to increase their spending by about 20% this year from 2022 without reaping additional barrels.
Nabbing a competitor allows drillers to augment production while keeping costs in check, said Muhammad Laghari, a senior managing director at investment bank Guggenheim Securities.
“M&A is probably right now, in this inflationary environment, the most cost-efficient way to increase your cash flow per share,” he said.
While oil-price volatility in recent months complicated deals, the U.S. oil benchmark has dropped roughly $43 from its peak last June and is now in the $70 to $80 range, which supports negotiations between sellers and buyers, analysts said. Exxon CEO Darren Woods said on an earnings call in January that the company is looking for opportunities in the Permian but it is difficult to buy at the peak of a commodity cycle.
Some analysts say consolidation in the Permian could contribute to a slowdown in activity there because public companies—the most likely acquirers—have been more conservative with their drilling programs than private operators.
Source: Energycentral.com
