Upstream Dealmaking Full Throttle With ExxonMobil, Chevron Deals and More Consolidation Said Likely

Trading in U.S. upstream oil and gas was on cruise control between July and September, with an estimated $14 billion spent on 25 deals, but two megamergers announced this month may signal deals may be congested by the end of the year.

Enverus Intelligence Research’s (EIR) summary of upstream mergers and acquisitions (M&A) activity for Q3 2023 offered a precursor to two big deals already announced in October.

“The upturn in corporate consolidation has lifted a lack of developing opportunities to buy private assets, with two-thirds of deal value last quarter coming from combinations between public companies,” EIR analysts said. “This accelerated to an all-time high in October…”

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ExxonMobil earlier this month knocked down almost 60 billion dollars acquisition of Pioneer Natural Resources Co. based in Dallas, which is believed to be the third largest upstream transaction ever by enterprise value. Chevron Corp. followed this week with a $53 billion deal to buy New York-based Hess Corp.

Recently, rumors have spread that further US exploration and production (E&P) consolidation may be in the works.

Does E&P Consolidation Make Sense?

“As expected, the pace of consolidation has slowed in private E&P as the cream of the crop in terms of scale and quality has largely, but not entirely, been bought out,” said Andrew Dittmar, senior vice president of EIR. “The next logical step in consolidation is more links between public producers. This could have been slowly moving towards a historic deal like ExxonMobil’s purchase of Pioneer, but instead it happened right out of the gate and could very well be the biggest deal of the shale era.”

At the start of the third quarter before the Pioneer Natural deal, ExxonMobil “made a smaller bet on carbon capture and storage” with its Acquisition of Denbury Inc. for $4.9 billion., EIR analysts noted. Denbury is a Lower 48 E&P legacy, but “the main driver … is probably the infrastructure that the company has, specifically the carbon dioxide pipeline. The Denbury system could support ExxonMobil’s construction of a carbon sequestration center on the Gulf Coast.

“ExxonMobil is committed to its traditional energy business, which has become extremely profitable for the major, while working to decarbonize operations to meet its emissions targets,” Dittmar said. “That comes from a combination of upstream emissions reductions and building a carbon sequestration business.”

Enverus product owner John Gutentag said that by acquiring Pioneer, ExxonMobil not only expands its Permian Basin portfolio, “but also accelerates the Permian’s transition to a low-carbon future. ExxonMobil has set an ambitious target of net zero emissions by 2030 for its existing Permian assets and by 2035 for the newly acquired Pioneer assets, 15 years ahead of Pioneer’s original plan.”

Could this month’s huge deals spark more M&A in the oil and gas sector? It is probable.

Dittmar pointed to rumors that there may be a merger between the two Chesapeake Energy Corp. and Southwestern Energy Co., which, if it happens, would create a natural gas giant. There have also been reports that it is independent of multiple watersheds Devon Energy Corp. is in preliminary talks to tie up with global E&P Marathon Oil Corp.

Let’s go shopping

“The big independents are also likely to go on a buying spree targeting smaller and mid-sized manufacturers,” says Dittmar. “Nearly all of these smaller companies’ shares trade at meaningful discounts to larger E&Ps, increasing the opportunity for deals that create value for both buyers and sellers.”

During 3Q2023, e.g. Permian Resources Corp. and Earthstone Energy Inc. agreed to combine in a $4.5 billion transaction to create an independent company with more than 400,000 acres of pure Delaware Permian Basin.

“Within US shale, the most attractive acquisition targets will be companies with exposure to the Permian Basin,” Dittmar said. “The Permian is uniquely positioned among US shale plays because it has the most remaining high-grade reserves and the greatest opportunity for resource expansion. This expansion would benefit from shale well into the 1930s, albeit with higher supply costs.

“The outlook for shale is bright from here, and mergers and acquisitions will be robust as companies look to secure their piece of that future.”

Reducing emissions intensity has become a priority for many E&Ps in setting zero targets by mid-century. However, this is not necessarily the case with the latest high-profile transactions.

“Despite seeing more airtime on the environmental, social and governance rationale for trades, we have seen no clear evidence of US assets in the forward market valuing assets based on their emissions intensity,” Gutentag said.

Proposed federal emissions reporting rules, methane charges and other regulatory items “affect the asset selection process because some assets will have disproportionately high fees and retrofit costs, while others will be minimally affected.”

Chevron and ExxonMobil executives said in separate conference calls to discuss their tie-ups that they would work to improve emissions metrics.

“In terms of overall emissions from oil and gas operations, acquisitions by large companies are very optimistic for an industry that is improving its environmental footprint,” say EIR experts.

“There are some parallels” in the ExxonMobil and Chevron transactions, “as the majors try to replenish their pipelines to maintain production against a declining asset base,” Dittmar said. “This suggests that they think their legacy businesses will remain profitable into the 2030s.

“After 10 years of cutting exploration spending and focusing on getting capital back to shareholders, it’s time to take another look at oil and gas production growth.”

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