US Oil Companies Undergo Wave of Mergers and Acquisitions, Expectations for Continued Consolidation in the US Permian Basin

US 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 US Permian Basin, which includes parts of west Texas and southeast New Mexico.

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“We believe this deal should benefit Diamondback in the long term,” said Jonnathan Handshoe, an equity analyst at CFRA Research, who gave the company a “buy” rating. “Once the merger is complete, the company will be 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 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 grabbing” due to lack of investment

The Endeavor deal is the latest in a series 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 last 10-15 years, you’re now seeing this land grab for consolidation,” said Matt Willer, managing director and capital markets partner at Phoenix Capital, on Yahoo Finance . “Companies are not looking to expand. Oil producing area.”

He added: “Everyone knows where the oil is, so you start looking at it and saying, ‘OK, who owns that location now? How can we improve our portfolio through acquisitions to offset what we’ve done in the past? The fact that there’s 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 large oil and gas companies.

“The benefits of exploration are gone 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 costs … you don’t need an additional CFO and CEO.”

A by-product 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 had been forced to cut costs due to an oversupply of related gas. “As the gas content of oil wells increases, they have to reduce operating costs,” he said.

US 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 control of the supply market to larger players with the largest production area.

“If these giants together can get a more comprehensive foothold in the market, then they can control prices, 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. this year. What you saw,” said Willer.

The US Energy Information Administration recently lowered its forecast for US oil production this year, predicting that monthly output will not exceed the December 2023 record again until February 2025.

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