U.S. oil companies still have big investors to invest in, are mergers and acquisitions expected? (ASSOCIATED PRESS)
Diamondback Energy’s (FANG) $26 billion acquisition of Endeavor Energy highlights the wave of mergers and acquisitions by oil and gas producers sweeping the U.S. Permian Basin, which includes parts of western Texas and southeastern New Mexico.
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“We believe this transaction should benefit Diamondback in the long run,” said Jonnathan Handshoe, equity analyst at CFRA Research, which gave the company a “buy” rating. “Once the merger is completed, the company will become the third largest producer in the Permian Basin.”
Diamondback’s production capacity will increase by 76% and net area will increase by approximately 70%. According to the merger announcement, the combined company will still be able to break even even if New York oil futures trade below $40 a barrel. New York oil prices are currently around $77 a barrel.
When Diamondback announced mergers and acquisitions on Monday and better-than-expected 2024 revenue guidance, it pleased Wall Street and its stock price closed up more than 9%.
“Land grab” due to lack of investment
The Endeavor deal is the latest in a string of acquisitions, including Chevron’s (CVX) acquisition of Hess and Exxon Mobil’s (XOM) acquisition of Pioneer Natural Resources. Occidental Petroleum (OXY) also announced the acquisition of private oil and gas producer CrownRock.
“Because of the lack of reinvestment in inventory over the past 10-15 years, you’re seeing this land grab for consolidation,” Matt Willer, managing director and partner of capital markets at Phoenix Capital, said on Yahoo Finance. “Companies are not looking to expand. Oil production area.”
He added: “Everyone knows where the oil is, so you start looking at it and say, ‘Okay, who owns that location now? How can we enhance our portfolio through acquisitions to make up for what we’ve done in the past? The fact that there has been no investment in mining for ten years?”
“Operating costs need to be reduced”
The Permian Basin was once a region developed primarily by smaller operators and with more dispersed property rights. Technological advances over the years have made drilling in the area more cost-effective and attractive to major oil and gas companies.
“The benefits of exploration have disappeared now. The geology here is already well known, and companies are mining and understanding the technology.” Ed Hirs, an economist and energy researcher at the University of Houston, told Yahoo Finance: “(M&A) will definitely save money. The expenses…you don’t need an additional CFO and CEO.”
A byproduct of oil drilling is natural gas, commonly known in the industry as associated gas. As operators drill further underground, the ratio of natural gas to oil in the wells gradually increases.
Hirs said the company was forced to reduce costs due to an oversupply of associated gas. “As the gas content of oil wells increases, they have to reduce operating costs,” he said.
U.S. production hit a record last year, offsetting output cuts by Saudi Arabia and other oil producers to keep crude prices up.
Recent consolidation is likely to shift more supply market control to larger players with the most production area.
“If these giants can collectively have a more comprehensive foothold in the market, then they can control pricing, and one of the ways to do that is to adjust production costs. I think that’s what we expect to be able to do in the second half of this year. What you saw,” Willer said.
The U.S. Energy Information Administration recently lowered its forecast for U.S. oil production this year, predicting that monthly output will not exceed the December 2023 record again until February 2025.
2024-02-13 06:56:15
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