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Tsvetana Paraskova

Tsvetana Paraskova

Tsvetana is a writer for Oilprice.com with over a decade of experience writing for news outlets such as iNVEZZ and SeeNews. 

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U.S. Shale Mergers Could Bring Steadier Oil Prices

  • The key driver of the industry now is returning more to shareholders and preparing for inventory stacked up for years of production ahead.
  • Last week, the U.S. oil industry saw its latest announcement of a big merger after ConocoPhillips said it had agreed to buy Marathon Oil.
  • Deal value so far this year has already surpassed the total deal value of $69 billion recorded for the entire first half of 2023.
Shale rig

The merger mania in the U.S. shale industry has set the stage for steadier oil prices, analysts say.

As producers become bigger, they focus on shareholder returns and wouldn't be inclined to respond to every price spike with a major boost in drilling that ultimately floods the market with oil and depresses prices.

This relentless drilling for higher production has been the shale industry's modus operandi for a decade before Covid and the demand and market crash. Until 2020, many smaller producers sought to maximize output and price realizations whenever oil was heading higher.  

But as the industry matured and balance sheets and market valuations strengthened after the record-high earnings of 2022, a wave of consolidation began towards the end of 2023. The big companies are looking to become bigger by adding premier assets of the takeover targets to their portfolios.

However, the key driver of the industry now is returning more to shareholders and preparing for inventory stacked up for years of production ahead, without the need to grow organically by investing too much cash flow into the drilling of new locations and wells.

Related: U.S. Oil, Gas Drillers Stuck In A Rut

Last week, the U.S. oil industry saw its latest announcement of a big merger after ConocoPhillips said it had agreed to buy Marathon Oil in an all-stock deal with an enterprise value of $22.5 billion, inclusive of $5.4 billion of net debt.   

The transaction would be immediately accretive to cash flow and earnings, giving investors another reason to cheer the ongoing wave of consolidation.

These days, U.S. oil firms prefer to use their increased market valuation to buy rivals or smaller companies in all-stock deals, which immediately add developed and operational wells to inventory without the buyers sinking more money to drill new wells from scratch.

The deals will create a more stable environment for shareholders and oil prices, analysts reckon.

And the merger wave is far from over, many market observers say.

"What we're seeing now is because of the consolidation, you're getting larger companies who have control of more of the oil in the US and are going to be able to execute on moderate low to mid-single digit oil production growth," Jason Gableman, an analyst at TD Cowan, told Yahoo Finance last week. 

This "should result in a healthier commodity backdrop where they'll be less responsive to spikes in oil prices and support higher and more stable oil prices," Gableman added.

The consolidation is set to continue, many analysts say, with increased deal-making in shale plays other than the Permian, which commands high prices and has little acreage at reasonable prices left for acquisitions.

Deal value so far this year has already surpassed the total deal value of $69 billion recorded for the entire first half of 2023, Atul Raina, Vice President of Upstream M&A Research at Rystad Energy, wrote in an analysis last week. 

"However, with a limited number of opportunities available in the Permian coupled with high commodity prices, we expect increased M&A activity outside of the Permian," Raina said.

North America is set to continue driving global upstream M&A activity, with opportunities worth nearly $80 billion on the market, including about $41 billion worth of non-Permian shale opportunities, the analyst noted.

Most large U.S. companies, including the supermajors and independents such as ConocoPhillips, have already announced M&A deals, but there are others that could join the consolidation wave, according to analysts.

EOG and Devon Energy are the largest public U.S. oil and gas companies that haven't announced deals, yet, the Financial Times notes.

In Devon Energy's case, it's not for lack of trying—the company was reportedly beaten by ConocoPhillips for Marathon Oil.  

"Nobody wants to end up being too small to compete with some of the big guys. So I think you will see some of this continue," Sarah Hunt, chief market strategist at Alpine Saxon Woods, told Yahoo Finance.

By Tsvetana Paraskova for Oilprice.com

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