Dealmaking among U.S. natural gas and oil operators is showing few signs of slowing, as consolidation is giving rise to the question of how long the industry revamp would continue.
Combinations are underway by some of the biggest U.S.-based exploration and production (E&P) companies and oilfield services firms. Domestic upstream consolidation in 2023 was estimated at $192 billion. Through the first three months of this year, merger and acquisition (M&A) activity topped $50 billion.
Ask half a dozen analysts why the merger activity has accelerated, and there may be half a dozen different responses. Cost efficiencies, market volatility, shareholder returns, regulatory and environmental oversight are but a few of the items that executives have ticked off in their conference calls to discuss the transactions.
The energy sector is working to adapt to a challenging landscape, pressured by growth in alternative resources, as well as oversight by regulators and stakeholders that want the industry to work toward net-zero emissions.
Basic geology is a primary reason for merging operations, analysts told NGI. The Lower 48’s gas and oilfields are maturing. Tier one reserves generally have been tapped. E&Ps are extending development into the less abundant fields. And tying up with a peer may be less expensive than exploration.
Maturing Lower 48 Fields
According to the oil and gas analyst team of Houston-based ADI Analytics, the transactions “are an implicit acceptance – even if public commentary highlights growth opportunities – that shale is maturing…With prime acreage becoming scarce, companies are increasingly looking to M&A to access new reserves and production opportunities.”
While the dealmakers are spending considerable sums to build portfolios, it still comes back to shareholder returns, according to the ADI team led by Uday Turaga.
In many of the transactions over the past year, the biggest operators are becoming even bigger.
ExxonMobil last year slapped down $59 billion to nab Permian Basin heavyweight Pioneer Natural Resources Co. Chevron Corp. followed closely, in a $53 billion transaction to buy Hess Corp.
Lower 48 natural gas rivals Chesapeake Energy Corp. and Southwestern Energy Co. agreed to combine in an estimated $7.4 billion deal. Permian giant Diamondback Energy Inc. is paying $26 billion for privately held Endeavor Energy Resources LP. At the end of May, Houston-based ConocoPhillips, the world’s largest independent, moved to consolidate with cross-town rival Marathon Oil Corp. in a $22.5 billion all-stock transaction.
Returns top the “agenda of C-suites across operators, and this is influencing how these transactions are being structured,” the ADI analysts said. In addition, while “operational excellence will continue to be important,” the mergers “will drive renewed focus on technology and innovation, where larger E&P operators will enjoy an advantage.”
Bigger Companies, More Access
A primary reason for consolidation across the energy sector can be traced to improving efficiencies, University of Houston (UH) energy expert Ramanan Krishnamoorti told NGI. He is vice president of energy and innovation.
Krishnamoorti explained that when companies have adjacent operations, efficiencies can become key to combining. He cited the mega-merger by ExxonMobil of Pioneer. The companies have adjacent Permian operations.
In addition, “ExxonMobil has a large pipeline that they’ve installed to come to the Gulf Coast. And they’ve expanded their Gulf Coast refineries. They needed that ability to bring in as much crude as they could from the Permian.”
Another element in the M&A activity is that overall development is declining, with fewer drilling opportunities. The question becomes, where to expand?
Another concern “is that we’re not going to get any more new pipelines…no more right away,” Krishnamoorti said. Companies with pipelines in the works face regulatory scrutiny, potentially causing years of delay.
The Equitrans Midstream Corp.-operated Mountain Valley Pipeline, designed to move up to 2 million Dth/d from Appalachia to Southeast markets, initially launched about nine years ago. It was given federal approval in 2017. However, it did not get the green light to open the spigots until this month.
Even giants like ExxonMobil may have issues “evacuating any crude out of the Permian that isn’t already tied back…” The ability to move oil and gas supplies to market is a “very clear” reason for M&A.
Rystad Energy senior analyst Matthew Bernstein said the “Shale 4.0” era, which started as consolidation accelerated last fall, has seen a shift by management teams and investors toward building companies of scale for the long term.
With a “limited lifetime of their remaining inventories,” E&Ps want to “ensure that their assets can continue to deliver these returns not just in the upcoming quarters, but for decades to come,” Bernstein said.
Hey, I Wanna Go!
Another factor in why consolidation has been swift may be traced to the fear of missing out, Krishnamoorti said.
“In the parlance of Gen Z, there’s also FOMO.” When one company makes a big deal, many peers want to keep up to ensure they have enough opportunities.
The Chevron-Hess deal, for example, is “clearly…the fear of missing out,” he said. Hess is ExxonMobil’s junior partner in the Stabroek field offshore Guyana.
While Chevron has some asset overlap with Hess, the San Ramon, CA-based major “is really looking at the offshore plays that have made it absolutely the leader in being able to take those plays and make them more economical, more effective, and able to play big.” The Hess addition is “building on complementary strengths.”
Without merging, some E&Ps also face the possibility of having stranded assets, Krishnamoorti said.
No company wants to be “islanded,” he said. For example, Occidental Petroleum Corp., one of the top Permian E&Ps, is “getting islanded in some ways in the Permian and beyond, in terms of the other large players sort of cutting off access for them. So they’re going to have to depend on third-party pipelines to evacuate” the oil and gas.
Beyond takeovers, some U.S. E&Ps could swap assets, giving each a “bigger” foothold in a particular basin. Krishnamoorti said, “I think that’s very likely to happen.”
Environmental Benefits?
Consolidation could help to reduce a larger company’s emissions, according to the Environmental Defense Fund (EDF), which often has partnered with E&Ps. EDF’s Andrew Baxter, senior director of Business and Energy Transition, explained.
The “potential upside,” said Baxter, is that “larger companies with stricter environmental commitments could bring high-emitting assets under their umbrella, leading to better mitigation strategies like methane reduction.”
Consolidation also “allows for economies of scale in deploying advanced technologies for cleaner operations across a wider asset base.”
Still, there are some “serious risks,” Baxter said.
“Sellers might divest aging, high-emission infrastructure to smaller players with weaker environmental focus, creating stranded assets with potential for long-term environmental damage,” he noted. M&A by the industry is “inevitable,” but “it can be managed in a way that promotes emissions reduction and responsible asset management.”
