Wave of deals puts US shale oil back in focus

NEW YORK, United States  —American shale oil is back at the center of the global petroleum game, a driver of major deals involving petroleum giants more inclined to buy up rivals than to undertake wildcat exploration.

On Monday, Diamondback Energy announced the $26 billion acquisition of Endeavor Energy, combining two of the top 10 producers in the Permian Basin, which has the largest unconventional petroleum reserves in the United States.

The Permian, which is located in western Texas and eastern New Mexico, has emerged as an especially hot commodity.

In October, ExxonMobil announced the acquisition of Pioneer Natural Resources, the biggest Permian producer, for about $60 billion.

That was followed in December by Occidental Petroleum’s $12-billion takeover of CrownRock, another Permian producer.

“Consolidation in the space was a bit overdue because the exploration and production space is fairly fragmented, or had been, until all these deals,” said CFRA Research analyst Stewart Glickman.

Fragmented US oil and gas market

“People have this idea that it’s very monopolistic,” Richard Sweeney, an economics professor at Boston College, said of the oil industry in places like the Permian.

“The US oil and gas market is incredibly fragmented,” Sweeney said. “There’s, like, easily 50 firms that drill a substantial number of wells in Texas.”

One large deal that doesn’t involve the Permian is Chevron’s $53 billion purchase of Hess Corporation. However, Chevron highlighted the appeal of Hess’s assets in the Bakken region in the state of North Dakota, another big shale region.

Such shale basins take advantage of horizontal drilling techniques, which permit the drilling of wells from miles away once large companies buy neighboring sites.

The addition of the Pioneer acreage “means fewer wells” and lower capital spending, said Kathryn Mikells, chief financial officer at ExxonMobil.

While the investment surge in the Permian has helped to lift US oil production to an all-time high above 13 million barrels per day, analysts say the wave of mergers will not necessarily translate into ever-higher output.

More production overall?

“The more concentration you get, the greater the chance that you will see less production,” said Bill O’Grady of Confluence Investment Management. “It’s competition that leads to greater supply.”

Sweeney predicted that companies like ExxonMobil and Occidental will be more selective in drilling the best prospects from their increased properties, focusing on highly profitable production.

“It’s more economic to buy someone else’s reserves than to look for new locations in the United States,” said Andy Lipow of Lipow Oil Associates, who expects more US-centered deals in part because “there aren’t that many attractive opportunities outside of the United States.”

Wall Street has generally blessed the shale-focused transactions as a preferable option to costly exploration campaigns; the trend also doesn’t threaten the industry’s ability to keep plying shareholders with dividends and stock repurchases, said Glickman.

The shale deals come as some financial heavyweights such as BNP Paribas, Barclays and HSBC shun large new petroleum projects amid pressure from environmentalists.

Fossil fuel projects

Efforts to address climate change could doom fossil fuel projects in the long term, but fossil fuels still account for more than three quarters of global energy use. If anything, these deals show the staying power of petroleum.

The recent deals have included the natural gas-focused takeover of Southwestern Energy by Chesapeake Energy for $7.4 billion.

But Glickman expects less consolidation in this area, noting the volatility of natural gas prices, which have dropped to their lowest point in three and a half years in the United States.

“You can probably make safer budgeting assumptions with less volatility on the oil side than on the gas side,” he said, adding that oil “would still probably be the target, if you’re trying to grow acquisition.”