• A tie-up between Exxon and Pioneer would put pressure on Chevron and other rivals to pursue deals of their own

Collin Eaton and Benoît Morenne, WSJ

HOUSTON
EnergiesNet.com 10 09 2023

The U.S. oil industry could be on the cusp of consolidation that would deliver a band of unruly shale frackers into the hands of a few old-guard producers.

is trying to seal a deal to buy  in a blockbuster takeover that could be worth roughly $60 billion, The Wall Street Journal reported Thursday. It isn’t the only company looking for a deal.

Rivals and are also scouring the shale patch for targets, while smaller drillers have started to make it clear they are available for the right price, according to people familiar with the matter. 

The most desirable drilling bounties are in the oil-soaked Permian Basin of West Texas and New Mexico, where investors and energy executives say a deal-making scramble is in the works.

A wave of deals could reshape the U.S. oil-and-gas industry, ushering it from an era defined by relatively small drillers chasing growth to one dominated by the largest Western oil companies. The emerging order could resemble what came out of the industry’s megamergers that began in the late 1990s and included linkups between Exxon and Mobil, Chevron and Texaco, and and Amoco, among others.

Oil producers have escaped rigorous antitrust scrutiny historically, as regulators often take the view that their products compete in a global market. Current and former oil executives said they felt regulators wouldn’t likely block a new round of deals.

Investors signaled their expectation that more deals could be in the offing by piling into the stocks of frackers on Friday. All told, they added about $16 billion in market capitalization to the 10 largest independent drillers following the news. 

Exxon, Chevron and their peers are sitting on historically large war chests, filled by a prolonged period of high commodity prices because of postpandemic economic growth and Russia’s invasion of Ukraine. 

But the companies have been hamstrung in deploying the cash by investors who have insisted producers keep spending disciplined and give them huge payouts instead of chasing growth unprofitably, as the companies did over the previous decade. Some investors have pushed oil companies to invest in greener energy sources and reduce emissions, which many drillers have done, to varying degrees.

Drillers have accommodated investors for the past two years, but appear ready to test the waters on putting their cash to use, with Exxon CEO Darren Woods leading the way.

The deliberations between Exxon and Pioneer were fluid Friday, with people close to the matter cautioning there still might be no deal. One issue: Some shareholders have expressed reservations about the potential tie-up. But in a sign some are betting on a deal, Pioneer stock shot up more than 10% Friday. Exxon shares edged down less than 2%. 

If consummated, the deal would immediately put pressure on Exxon’s rivals, Chevron chief among them. Exxon is by far the largest Western oil company, with a market capitalization of about $430 billion, and adding Pioneer would strengthen its market share and pricing power with suppliers and service companies while positioning it to boost oil production for years to come. 

Chevron CEO Mike Wirth has been looking for a big deal of his own. After gobbling up a pair of smaller drillers over the past three years, Wirth has begun thinking about leaving the company with as much running room as possible before he retires, said people familiar with the matter.

As recently as the beginning of the year, Chevron was interested in , one of the largest producers in the Permian, according to people familiar with the matter. Acquiring Occidental, which has a market capitalization of about $55 billion, would rival Exxon’s deal for Pioneer, but Chevron’s interest has fizzled in recent months. 

Chevron has since moved on to other, smaller targets, people familiar with the matter said. There are several options in the Permian, including CrownRock, one of the region’s largest private producers, which has hired bankers to advise it on a potential deal and is seeking a sale price of around $10 billion to $15 billion. 

Small producers spearheaded the shale boom, deploying new production techniques to unlock troves of oil in regions shunned by others—and turning the U.S. into the world’s largest oil producer. Large public companies followed, turning their attention away from far-flung locales and back to places such as the Permian Basin, a dormant region until the advent of fracking. 

Myriad rowdy wildcatters grew shale by taking on billions of dollars of debt and, with investors’ blessing, deploying thousands of oil rigs. But many of these producers drilled themselves out of cash on wells that proved less profitable than promised and filed for bankruptcy when oil prices crashed between 2014 and 2015. The period reached its nadir during the pandemic when oil prices collapsed again.

Now, the large cohort of middling shale companies that ran up huge debt piles to grow as fast as possible are too small to attract capital from Wall Street and are running out of their best drilling sweet spots, making them cheaper acquisition targets.

“There are too many companies,” said Mark Viviano, a managing partner at investment firm Kimmeridge Energy Management. “Consolidation is the last piece of the puzzle in rationalizing the shale industry.”

Market conditions are ripe for deals as oil prices have recovered from a trough earlier this year and are high enough that sellers think they can get a good deal, but not so high as to deter potential buyers, said Dan Pickering, chief investment officer at financial services firm Pickering Energy Partners.

Historically, big deals in the oil patch have come in waves. BP’s $48.2 billion acquisition of Amoco in 1998 set off the deal bonanza that created the world’s supermajors. More recently, after the onset of the pandemic in 2020, ConocoPhillips scooped up Concho Resources and ’s Permian assets for almost $20 billion combined; Pioneer bought Parsley Energy and DoublePoint Energy for a combined $11 billion; Chevron snapped up Noble Energy for about $5 billion.

Pickering said a deal between Exxon and Pioneer would create new momentum for transactions in the Permian as it would demonstrate that even one of the largest U.S. producers has to build up its inventory, and that remaining resources in the most prolific basin in the nation are becoming scarce. 

“When one company makes a big move, it forces everyone to think harder about where their chess pieces go,” Pickering said. “Will they miss something if they don’t act relatively quickly?”

Lately in the oil patch, bigger companies have attracted an outsize portion of investors’ capital. Last year, some of the largest institutional investors, including Capital Group, Fidelity and T. Rowe Price, increased their U.S. energy holdings to a combined $170 billion, up 27% from 2017. 

But most of that investing benefited the five largest U.S. oil companies—Exxon, Chevron, ConocoPhillips, and , as well as oil-field services giant —which together accounted for about $88 billion of the investment firms’ holdings last year, up from $49 billion in 2017, according to an analysis by Kimmeridge. 

The lack of available money is squeezing smaller players and prompting them to sell, investors said. 

“At these [oil] prices, a lot of boardrooms are going to have to evaluate” selling their companies over the next year, said Wil VanLoh, chief executive of private investment firm Quantum Energy Partners. 

Such deals reduce the acquirer’s borrowing costs, extend the lifespan of their remaining inventory of economic drilling locations and cut operating costs. “There’s a lot of industrial logic to it,” he said. 

A Pioneer tie-up would make Exxon by far the largest oil-and-gas producer in the contiguous U.S., almost 50% bigger than Chevron, which is currently the largest producer in the region, according to energy research firm Wood Mackenzie. 

Seeing Pioneer sell itself after a long history of scooping up smaller rivals in the Permian might trigger a panic among other industry players, said Alex Beeker, a Wood Mackenzie analyst. 

“If there’s any deal to trigger a bigger M&A wave, this might be it—watching Pioneer switch from a consolidator to a seller,” Beeker said.

Write to Collin Eaton at collin.eaton@wsj.com and Benoît Morenne at benoit.morenne@wsj.com

wsj.com 10 07 2023