Big Oil enters 2024 boosted by US industrial consolidation.
The oil and gas industry has gone on a $250 billion buying spree in 2023, taking advantage of high company stock prices to secure lower-cost reserves and prepare for the next upheaval in an industry likely to undergo more consolidation.
A surge in oil demand – as global economies emerged from the pandemic recession – has reignited buyer enthusiasm. Exxon Mobil, Chevron Corp and Occidental Petroleum have made acquisitions worth a combined $135 billion by 2023. ConocoPhillips has completed two major deals in the past two years. The big consideration in this deal is the largest shale field in the US, the Permian field in west Texas and New Mexico. The four companies are now able to control about 58% of future production there. Each of them aims to pump at least 1 million barrels per day (bpd) from the oil field, which is expected to produce 7 million bpd by the end of 2027.
New deals
However, more deals are expected. Three-quarters of energy executives polled in December by the Dallas Fed expected more oil deals worth $50 billion or more to spring up over the next two years.
Endeavor Energy Partners, the largest private Permian shale oil producer, is exploring a sale that could further concentrate U.S. shale oil production.
Consolidation will have knock-on effects on oilfield service providers and pipeline operators. Companies that provide drilling, hydraulic fracturing and sanding and transport oil and gas to market are entering an era with fewer customers who exercise more power over price.
Consolidation is good for producers, but it doesn’t help service companies at all. It will squeeze their profit margins as existing contracts are renegotiated.
In turn, pipeline operators are facing their own wave of consolidation with fewer new oil and gas pipelines being approved and built.
Extensions to existing lines from the Permian field will provide some relief, but by mid-2025 pipeline capacity from the Permian will be 80%-90% full.
Share swaps rather than large cash outlays are preferred as a mode of acquisitions
The latest acquisitions demonstrate oil companies’ search for untapped and lower-cost oil and gas reserves. Among the major deals of 2023 were:
- Exxon’s $59.5 billion bid for Pioneer Natural Resources and
- the acquisition of Denbury Inc for $4.9 billion;
- Chevron bid $53 billion for Hess and bought oil rival PDC Energy for $6.2 billion.
- Occidental will pay $12 billion for CrownRock.
Helped by their strong stock prices, most of the year’s big acquisitions have been equity swaps rather than the big cash outlays that would have threatened buyers’ balance sheets if oil prices fell as they did in 2016 and 2020.
Exxon, for example, has about $33 billion in cash, more than six times the amount it held four years ago.
A rate hike in 2023 made paying for buybacks in shares more attractive to investors than financing new renewable energy projects with cash. Offshore wind projects in the US and France have been canceled due to rising interest rates and supply chain costs.
Producers also acknowledged that the U.S. move toward renewable fuels, electric vehicles and greater energy efficiency will reduce fossil fuel consumption and squeeze companies with high production costs.
Global oil demand rose by about 2.3 million barrels per day (mbpd) in each of the past two years, to 101.7 mbpd.
The increase squeezed global inventories, helping to bolster prices as OPEC and its allies kept output tight.
Trust Economics expects oil output to rise by an average of about 250,000 barrels a day over the next five years, half the level of the previous five years, as oil majors focus on boosting cash flows rather than production. Slow growth helps companies with idle inventory control costs and boost margins.
The merger prompted US antitrust regulators to ask Exxon and Chevron for additional information about their purchases, delaying closing the deals. Both predict they will get approval, pointing to the size of the U.S. oil market and aggressive small competitors as signs that competition will remain strong.
The emergence of fewer, larger oil producers focused on extending the longevity of their fossil fuel businesses could put the companies at greater tension with governments prioritizing the shift to clean energy sources.
Meanwhile, global oil prices are expected to remain largely flat in 2024, averaging around $83 a barrel in 2023, up from $99 in 2022. Trust Economics sees oil in 2024 trading between $75 and $95 per barrel, up from $64 per barrel on average in 2019.
