The US shale oil sector is witnessing a wave of corporate takeovers, marking the beginning of a new era, dominated by giant companies that prefer to buy out competitors rather than explore new fields.
Last week, Diamondback Energy was the latest company to announce the $26 billion purchase of Endeavor Energy, a union that will bring together two of the ten largest operators in the so-called Permian Basin.
This region between West Texas and southeastern New Mexico contains the largest reserves of unconventional crude oil in the United States.
This type of oil trapped in the rock is extracted by injecting water and chemicals under very high pressure, which breaks up the rocks and allows the black gold to be extracted. This technology is known as “hydraulic fracturing.”
In October, ExxonMobil announced $59.5 billion to buy Pioneer Natural Resources, the largest producer in the Permian Basin, ahead of other mergers and acquisitions such as Occidental Petroleum and Crown Rock, for $12 billion a few months ago.
“This consolidation was on the horizon, because the landscape was fragmented,” with many operators, including some of modest size, explained CFRA's Stuart Glickman. “They want to grow in the aquarium,” he summed up.
“There are easily 50 companies with a significant number of wells in Texas,” added Richard Sweeney, a professor at Boston College.
Chevron's $53 billion purchase of Hess, also filed in October, is not part of this merger move in Texas, as Hess does not own assets in the Permian Basin.
This fragmented landscape represents technical limitations to the controversial extraction method of “hydraulic fracturing,” which has been widely criticized for the amount of water and chemicals it requires.
Until now, it has not been possible to practice lateral, also known as horizontal, drilling. This technology makes it possible to explore rocks whose exploitation may require the installation of another well, sometimes several kilometers from the initial production point.
“Longer lateral drilling means fewer wells and therefore lower costs,” ExxonMobil CFO Katherine Mikels said when she pitched the Pioneer purchase to analysts.
The combined lands – resulting from the merger of companies and their oil fields – open up new possibilities in terms of horizontal or directional drilling, by allowing access to different hydrocarbon deposits far from each other, from the same well.
Diamondback Energy's CFO, Kaes Van't Hof, revealed that around 150 to 175 lateral drill holes could be extended once the Endeavor purchase is completed.
In any case, there will not necessarily be an increase in crude oil production, according to analysts, since the United States is releasing 13.3 million barrels per day of oil into the market, a record for the country.
“It's the competition that generates the most barrels,” explains Bill O'Grady of Confluence Investment Management.
On the other hand, O'Grady says, “focus should lead to moderation of production.”
That's because oil companies “will be looking to get their unit costs down (per well) and that maybe makes them a little more selective about which wells to tap” and which ones not to tap, rather than increasing volumes, Richard Sweeney said.
He added: “They are not in a rush to pump more barrels into the market.”
Behind this buying frenzy, there is actually a wise approach to the future of this sector.
“It's cheaper to buy reserves from another company than to look for new reserves elsewhere in the U.S.,” explains Andy Lipow of Lipow Oil Associates. “And there are not a lot of attractive opportunities abroad. So I think consolidation will continue.”
Shareholders in listed oil groups “will not be enthusiastic about a massive expansion project” and the development of new fields, which could erode the dividends and share buybacks that companies have become accustomed to. Alternatively, they could be tempted to buy proven reserves, Glickman asserts.
This trend is occurring in a context characterized by a shift away from financing oil and gas projects, in particular BNP Paribas, Barclays and HSBC.
Combating climate change could eliminate fossil fuels in the long term, which still account for more than 75% of global energy consumption.
In the gas sector, there have also been some transactions, most notably Chesapeak Energy's purchase of Southwestern Energy for $7.4 billion, which was announced in January.
Glickman expects a more moderate strengthening in this sector, given that the price of natural gas in the United States is at its lowest levels in three and a half years, which is a sign of the instability of this sector, which is very sensitive to the climate.
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