Major Oil Players Enter 2024 Strengthened by U.S. Industry Consolidation
In 2023, the oil and gas industry embarked on a $250 billion acquisition spree, capitalizing on the high stock prices of companies to secure lower-cost reserves and prepare for anticipated changes in an industry poised for more consolidation.
The resurgence in oil demand following the global economic recovery from the pandemic downturn fueled the enthusiasm of acquirers. Major players like Exxon Mobil, Chevron Corp., and Occidental Petroleum collectively undertook acquisitions totaling $135 billion in 2023. ConocoPhillips also concluded two significant deals in the last two years.
The focal point of this acquisition trend is the Permian Basin, the largest U.S. shale oil field located in west Texas and New Mexico. With these transactions, the four companies are now positioned to control approximately 58% of the future production from the Permian Basin.
Each company aims to achieve a production rate of at least 1 million barrels per day (bpd) from this oilfield, which is projected to produce 7 million bpd by the end of 2027.
Anticipating further industry transactions, three-quarters of energy executives surveyed in December by the Federal Reserve Bank of Dallas predicted the emergence of more oil deals valued at $50 billion or more in the next two years.
Notably, Endeavor Energy Partners, the largest privately held Permian shale producer, is currently exploring a sale, which could potentially concentrate U.S. shale oil output even further.
“Consolidation is actively changing the landscape,” said Ryan Duman, director of Americas upstream research at energy consultancy Wood Mackenzie. “A select few companies will determine whether (production) growth will be strong, more stable or somewhere in between.”
The consolidation within the oil and gas industry is expected to have ripple effects on oilfield service providers and pipeline operators. Entities offering drilling, hydraulic fracturing, sand provision, and oil and gas transportation to the market are entering a phase characterized by fewer customers who wield increased influence over pricing dynamics.
As major oil and gas companies combine forces and increase their control over production, the dynamics of the service and transportation sectors are likely to shift, with implications for pricing structures and market competition.
“Consolidation is good for producers but doesn’t help service companies at all. It will squeeze their margins as existing contracts are renegotiated,” said an executive with a U.S. oil producer who declined to be identified because he was not authorized to speak publicly.
The consolidation within the oil and gas industry is anticipated to impact pipeline operators, with fewer new oil and gas pipes being approved and built, according to Rob Wilson of pipeline experts East Daley Analytics. While expansions to existing lines from the Permian Basin will provide some relief, estimates from East Daley suggest that by mid-2025, pipeline capacity from the Permian will be 90% full.
The recent acquisitions reflect oil companies’ pursuit of untapped and lower-cost oil and gas reserves. Key deals in 2023 included Exxon’s $59.5 billion bid for Pioneer Natural Resources and the purchase of Denbury Inc for $4.9 billion. Chevron offered $53 billion for Hess and acquired oil rival PDC Energy for $6.2 billion, while Occidental will pay $12 billion for CrownRock.
Most major acquisitions in 2023 were stock swaps, facilitated by strong share prices, minimizing large cash outlays that could jeopardize buyers’ balance sheets in the event of falling oil prices. Rising interest rates in 2023 made paying for acquisitions with stock more attractive to investors than funding new renewable energy projects with cash.
The move towards renewable fuels, electric vehicles, and greater energy efficiency in the U.S. is expected to impact fossil fuel consumption, prompting oil producers to recognize the need for consolidation. Global oil demand rose about 2.3 million barrels per day in each of the last two years, tightening global stocks and supporting prices.
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Wood Mackenzie anticipates oil output to rise at an average of about 250,000 barrels per day annually over the next five years, reflecting a shift in focus by major oil companies towards boosting cash flow rather than production. The consolidation has prompted U.S. antitrust regulators to seek additional information from Exxon and Chevron, potentially delaying deal closings.
The emergence of fewer, larger oil producers focused on extending the lifespan of their fossil fuel businesses may create tensions with governments prioritizing a shift to clean energy sources. Global oil prices are expected to be largely stable in 2024, with analysts predicting a trading range between $70 and $90 per barrel, above the $64 per barrel average in 2019.
