Wed. Dec 4th, 2024

More than two decades after the last round of megamergers rocked the oil industry, Exxon Mobil (XOM) and Chevron (CVX) are at it again. The big U.S. fuel brands last month sent shock waves through the oil industry with dueling $60 billion acquisitions that strengthen their hand in the Permian Basin and South America. They also helped bend the arc of fossil fuel demand into a question mark.




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Chevron’s plan to buy Hess (HES) and Exxon Mobil’s deal with Pioneer Natural Resources (PXD) mark the oil industry’s most intense consolidation since Exxon merged with Mobil and Chevron joined forces with Texaco starting in the late 1990s.

The consolidation at the turn of the century was a battle of attrition. Arguments for and against peak oil production dominated industry discussions. Oil industry leaders grabbed the largest slice possible of what was widely seen as a dwindling pie.

This time around is, in some respects, different. Many observers see Exxon Mobil and Chevron wagering that oil demand will not retreat as soon as some forecast, or hope.

Analysts view the mergers as a way for the two giants to hedge their bets while taking on very little financial risk. Third Bridge analyst Peter McNally says the all-stock nature of the deals makes them relatively risk-free, and frees the cash-rich companies to make additional investments.

“Even if the price of oil goes down, they’re not adding incremental leverage,” he said. “If people want to get worried about the energy transition, these companies are still invested in it.”

The bigger picture, McNally says, is that the energy transition is going to take money. “And like it or not, Big Oil has money.”

U.S. Oil Industry Leaders Look Beyond Shale

Exxon Mobil’s merger with Pioneer solidifies its foothold in U.S. shale, including the resource-rich Permian Basin. The top Permian producers in September were Occidental Petroleum (OXY), Pioneer Natural Resources, EOG (EOG), ConocoPhillips (COP) and Exxon Mobil.

Coming in down the list at ninth: Chevron. But through its Hess purchase, Chevron now has a 30% share in Guyana’s offshore Stabroek block. The energy industry touts offshore Guyana, a resource pioneered by Exxon, as the largest oil discovery in the last 10 years.

Exxon Mobil holds a 45% stake in Guyana’s Stabroek block, the largest area under development. China’s CNOOC International holds a 25% interest in the project. The Exxon-led venture has been drilling 18,000-foot-deep wells, with drillships working in water as deep as 8,900 feet.

Exxon Mobil’s affiliate Esso Exploration & Production Guyana Limited is the consortium operator. The area off Guyana’s coast reports more than 11 billion barrels of oil equivalent. The country is expected to produce more than 1 million barrels per day (bpd) by 2026, according to industry projections.

Currently, Hess’ share of net production is about 110,000 bpd. Exxon Mobil is producing around 400,000 bpd in Guyana. Exxon expects capacity of 1.2 million bpd by the end of 2027.

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Supermajor Consolidation

The price tags of the October oil mergers are close to those that created the supermajors two decades ago. Other similarities also can be drawn.

By the late 1990s, U.S. annual oil production had been in decline for more than two decades. North America was considered an “obsolete oil province.” Consolidation let energy companies bulk up to head offshore and search for expensive large-scale oil finds in deep water.

The benefits from bulking up are one clear link between the two eras of oil industry mergers.

“The one thing that’s similar with the previous era is that size and scale clearly do matter,” veteran energy analyst Arjun Murti told IBD in an interview. Murti is a partner at the Houston-based Veriten.

“There’s a lot of headwinds that the energy sector is facing and so there’s something to be said for size and scale,” he added.

Yet scale in itself could also become a headwind. Last week, Senate Majority Leader Chuck Schumer and other Senate Democrats penned a letter to Federal Trade Commission Chair Lina Khan, alleging that the Exxon-Pioneer deal and Chevron’s Hess purchase are “likely to harm competition.”

As of publication, the Federal Trade Commission has not weighed in on the two mergers. Khan, whose term is up next year, sued Amazon (AMZN) in September alleging the online marketplace has illegally maintained a monopoly. The Federal Trade Commission under Khan had also sued Microsoft (MSFT) to block the company’s $69 billion deal for Activision Blizzard.

Shale Treadmill Accelerates

Another headwind is the challenge of maintaining output at U.S. shale fields. In October, the Energy Information Administration reported that November oil output from the top U.S. shale-production regions was set to decline for a fourth straight month after reaching a record high in July.

In August, the Society Of Petroleum Engineers noted that “production from the average U.S. shale oil well is declining more rapidly every year.”

Citing a report from energy researcher Enverus Intelligence Research, the society said shale oil effectively doubled U.S. production over the past decade. But the rate at which well output is declining has steepened, slowing the shale production trend, Enverus Managing Director Dane Gregoris said in the report.

“We’ve observed that decline curves, meaning the rate at which production falls over time, are getting steeper as well density increases. Summed up, the industry’s treadmill is speeding up and this will make production growth more difficult than it was in the past,” Gregoris said.

Reminiscing On $15 Oil

Another crucial difference between the recent deals and the late 1990s: oil prices. The Exxon-Mobil and Chevron-Texaco tie-ups reflected a view that oil prices would forever be between $15 and $20 per barrel, according to Murti.

“The supermajor consolidations — they were specifically based on oil is going to be low forever,” Murti said. “So the only way to generate good profitability is to cut costs, merge with another company and extract synergies.”

Annual U.S. oil production bottomed in 2006. Crude prices rallied above $100 per barrel for the first time in 2008, just a couple years before the U.S. shale revolution broadened from natural gas to oil.

From March 2006 to November 2019, U.S. oil output rebounded 158% to 13 million barrels per day. The prior high-water mark was 10 million bpd in 1970.

Murti says the current deals “represent both defensive and offensive attributes,” while the last era of consolidation was “purely defensive.”

Oil Industry: Divergent Demand Forecasts

The $60 billion bets on oil by Exxon Mobil and Chevron come as the International Energy Agency (IEA) forecasts that demand for oil and natural gas will peak by 2030.

That is not a universal view. OPEC projects global oil demand will gradually rise by more than 16 million barrels per day over the next couple decades, from 99.6 million in 2022 to 116 million in 2045.

The IEA’s 2023 medium-term oil market report forecasts global oil demand will rise by 6% from 2022 to 2028, reaching 105.7 million bpd, supported by robust demand from the petrochemical and aviation sectors. But it sees worldwide fossil fuel demand peaking by 2030 due to electric vehicles, clean energy and slowing economic growth in China.

Forecasting global oil demand is, of course, complex. Both the IEA and OPEC have long track records of hits and misses, particularly in their longer-term forecasts. So do independent forecasters and the U.S. Energy Information Administration.

‘Wilting Under Scrutiny’

In September, the chief executives for both Saudi Aramco and Exxon Mobil said the IEA’s view of a rapid, EV-fed transition to new energy is not supportable.

That notion, said Aramco CEO Amin Nasser, is “wilting under scrutiny” because it’s driven by government policies, not what he called the “proven combination of markets, competitive economics and technology.”

CFRA Research energy analyst Stewart Glickman points out a clear “disconnect between the fossil fuel industry and the new energy crowd” on how quickly, and by how much, renewables will displace demand for fossil fuels.

Some 53% of U.S. oil and gas executives predict global oil consumption in 2050 will be higher than now, according to the latest Dallas Federal Reserve Bank Energy survey. Only 8% of those polled see consumption declining.

“The heavyweights in the industry, like Exxon, have projected out energy demand over the next 20-30 years, and they do account for an increase in renewables as well as a decrease in fossil fuel demand,” Glickman said. “It’s just that their outlook isn’t calling for a massive reduction in fossil fuel demand.”

Oil Stocks: A Tough Year For Exxon Mobil, Chevron

The past decade, for oil stocks, has swung from one historical event to another. The shale oil revolution launched a four-year rally in 2010. The subsequent oversupply of oil triggered a yearslong decline that included the global price war initiated by Saudi Arabia, followed by the 2020 demand crash cause by the coronavirus pandemic.

Exxon Mobil and Chevron stock both rallied beginning in March 2020, topping out in November 2022, as oil prices recovered from disruptions related to Russia’s invasion of Ukraine. Exxon Mobil has pulled back 10% from its September record high. Shares are down about 3% for the year and bouncing along recent lows.

Chevron stock chalked up its record high a year ago. Last month, shares dived after the company’s Oct. 27 quarterly report that showed rising expenses from overseas projects, most notably in Kazakhstan. The stock dropped almost 14% for October, leaving it with a year-to-date loss of almost 18%.

Exxon Mobil And Chevron Are Diversifying

While bulking up on the oil production side, the two U.S. oil industry supermajors are also diversifying their new-energy portfolios.

“The IEA is saying that oil is going to peak this decade,” McNally said. “Certainly Exxon and Chevron are not investing that way. But at the same time, they are making significant investments in their low-carbon businesses.”

Exxon Mobil even said it is shifting Pioneer’s net-zero goal from 2050 to 2035.

In a carbon capture bet, Exxon Mobil on Thursday closed its purchase of Denbury for around $5 billion. The move provides the giant oil company with a 1,300-mile-long pipeline dedicated to transporting carbon dioxide. It’s the largest such pipeline system in the U.S., according to Exxon. The deal also included Denbury’s 10 onshore carbon sequestration sites. That sets Exxon up with infrastructure to transport and store captured emissions.

The purchase also shows Exxon positioning to take advantage of federal subsidies. The August 2022 Inflation Reduction Act boosted the per-ton federal tax credit for captured carbon emissions to $85, a 70% rise from the previous credit. For carbon scrubbed directly from the atmosphere, the IRA provides $180 a ton directly to the facility operator, creating a significant cash flow where no market had existed.

Oil Giants Eye Lithium

Another opportunity backed at least indirectly by federal legislation is lithium, a key component in EV batteries. In May, Exxon Mobil paid Galvanic Energy $100 million for rights to 120,000 gross acres in the Smackover formation in Arkansas. Galvanic reported in 2022 the area could have 4 million tons of lithium carbonate equivalent. That would be enough to produce 50 million electric vehicles, which are eligible for U.S. tax credits if enough of their basic materials come from North America.

Exxon Mobil Chief Executive Darren Woods told analysts on the company’s Oct. 27 earnings call that the “aperture’s wide-open” on its lithium business prospects.

“Obviously, lithium is an important part of the transition going forward, and the electrification and the need for batteries and storage of power and energy,” Woods said. “It looks fairly promising at this stage.”

In July, Chevron Chief Executive Mike Wirth told Bloomberg the company was also looking into lithium. And in early October, Chevron Technology Ventures, the oil company’s venture capital arm, invested in Electric Era, a high-speed EV charging startup.

“They are doing both renewables and traditional oil and gas,” McNally said. “You see that in the investment dollars.”

Oil Industry M&A Highest in Nearly A Decade

Across the gas and oil industry, 2023 has been a big year for mergers and acquisitions. Analysts say the industry has struck about $250 billion worth of deals so far. That’s the highest annual total to this date since 2014.

Wall Street believes Occidental Petroleum, ConocoPhilips or Marathon Oil (MRO) could make a move soon. Large independents, including Diamondback Energy (FANG) or Devon Energy (DVN), could also be feeling pressure to bulk up.

“Over the next two to three years, we will see continued M&A at a pretty high level,” Veriten analyst Murti said. “If you’re any of the other oil majors, you’re going to say, ‘Hey, what are the remaining assets out there?’ “

Since Exxon Mobil announced plans to buy Pioneer on Oct. 11, media have reported that Devon Energy and Marathon Oil are in talks about a merger.

Last week, Reuters reported that ConocoPhillips was considering an offer for the private Permian producer CrownRock. Diamondback Energy, Devon Energy, Marathon Oil and Continental Resources (CLR) reportedly were also mulling bids.

The Old World Oil Patch

Will Europe’s big oil industry names, including BP (BP) and Shell (SHEL), respond to the moves by U.S. energy giants?

Britain’s BP paid $4.1 billion for bioenergy producer Arcahea Energy in December and another $1.3 billion for TravelCenters Of America in February. But acquisitions are generally pricey right now. Interim Chief Executive Murray Auchincloss said Tuesday that BP has no plans for more deals right now and is watching for opportunities that are “countercyclical” and are available for a good price.

Thursday, Nov. 2, after U.K.-based Shell served up mixed third-quarter results, AJ Bell investment director Russ Mould said the weak quarter could amplify speculation of a potential Shell-BP merger.

Senate Democrats, Schumer Alert FTC On Risks From Acquisitions By Exxon Mobil And Chevron

“The divergence in fortunes with BP will only add fuel to the fire in terms of speculation around some kind of merger between the two companies,” Mould said.

Murti says BP, Shell, France’s TotalEnergies (TTE) and other oil majors in Europe are facing more pressure to transition from integrated oil into integrated energy companies.

But “their ability to do large M&A in the oil and gas space, I think there is a question around it,” he said.

“The world needs energy, and that’s what these oil and gas companies provide,” Murti added. “The European oil [companies] should be part of it. Right now, they’ve got at least one hand tied behind their back by EU policy.”

Please follow Kit Norton on X, formerly known as Twitter, @KitNorton for more coverage.

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The post Exxon Mobil And Chevron Just Rekindled Supermajor Consolidation. What Does It Mean For Oil? appeared first on WorldNewsEra.

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