ExxonMobil's $60bn takeover of leading Permian basin producer Pioneer Natural Resources will likely spark a new round of consolidation in the shale patch as rivals seek to keep up.
The transaction — which is ExxonMobil's biggest since the 1999 Mobil merger — threatens to ignite a bidding war for other public independents in the prolific Permian basin of West Texas and southeastern New Mexico, which the oil majors initially overlooked in favor of more distant targets.
"It really opens the door to much larger-size deals and the kind of consolidation at the top end of the market that would definitely be game changing for the industry," says Andrew Dittmar, director at consultancy Enverus Intelligence Research.
Mergers and acquisitions had already been on an uptick in the US oil and gas space this year, led by private equity firms seeking to cash in on long-standing investments. Such deals have slowed in recent months with an increase in transactions among public companies picking up the slack.
Even as concerns have mounted that shale's best days may be behind it — following the breakneck pace of growth in the last decade that saw the US become the world's largest oil producer — the Permian still has some way to go and its prized acreage will have little trouble attracting suitors. Flush with record profits from last year when crude prices soared on the outbreak of the war in Ukraine, the oil sector has the firepower to engage in a renewed bout of M&A in the top-performing shale basin.
Fewer players, lower costs
Consolidation would help trim costs, as well as concentrate valuable inventory in the hands of the biggest oil companies with Permian output set to peak around the end of the decade. Buyers would also gain greater clout in contract negotiations with suppliers and services providers.
"Across the industry, the logic of consolidation in the highly fragmented Permian shale remains compelling with significant gains to be achieved from economies of scale," wrote analysts at Citigroup.
Such a trend toward fewer but bigger operators could also help support emissions reductions efforts. ExxonMobil already plans to reach net zero on emissions from its Permian operations by 2030.
Oil prices trading in a $80-$90/bl range may also be conducive to more dealmaking as they are not high enough to put off potential buyers while sellers expect to get good value for their assets, say analysts.
The major oil producers found themselves in the cross hairs of the Biden administration last year when they funneled record amounts of cash flow back to investors rather than heed calls to significantly expand output to counter high gasoline prices. Yet an increase in shale mergers would not necessarily raise significant issues on anti-trust grounds since ownership of Permian acreage is still scattered among a large number of operators.
The tie-up could also mark a return to the era of the megadeals of the past which gave rise to the supermajors. In contrast, the shale boom of the past decade and a half — spurred on by breakthroughs in horizontal drilling and hydraulic fracturing — was driven by hundreds of smaller independents who spent freely as they pursued a growth-at-all-cost strategy. Many have since fallen by the wayside and consolidation by the majors is seen as natural progression as the shale sector matures.
"The industry by the end of the decade is going to look a lot more like it did in the late 90s or early 2000s," says Dittmar. "We had a handful of majors that dominated a large portion of non-government global supply."
ExxonMobil's acquisition could also usher in a new era that can be described as "Shale 4.0," according to consultancy Rystad Energy.
"While capital discipline would still reign supreme, the ‘Shale 4.0' era would be unmistakably marked by consolidation," says Rystad senior analyst Matthew Bernstein. "It would see high-spending supermajors, already in possession of large portions of the tight oil inventory, consolidate swathes of shale resources under their hold."
