The U.S. oil industry is going through a major consolidation, with the weak out and the strong stronger, and that trend is expected to continue for some time.
Conocophillips’ deal with Marathon Oil is the latest example. As the largest independent oil and gas producer in the U.S., Conocophillips, like other oil companies, has been scrambling for a share of existing drilling in the U.S., buying other smaller companies to boost its cash flow and earnings to keep its investors happy.
Conocophillips CEO Ryan Lance has said the U.S. oil and gas industry needs to consolidate. There are simply too many players, and it is time to focus on scale and diversity, as consolidation is part of the industry’s natural cycle.
Commenting on the Marathon Oil acquisition, Lance said the deal would be immediately accredit to Conocophillips’ earnings per share, cash flow and dividend, and that Conocophillips sees significant synergies.
Merger frenzy
Rather than opening new lines of business, U.S. oil companies prefer to use mergers and acquisitions to boost market valuations, which can bring developed and operating Wells into production immediately, rather than having to invest a lot of money to start from scratch.
Conoco’s acquisition of Marathon would give Conoco a market capitalisation of more than $150bn, a surge that would extend its leading position as an independent oil producer and put it in the same league as the world’s leading companies, above BP and just below Shell.
In addition to Conocophillips, ExxonMobil is buying Pioneer and Chevron is working with Hess on oil resources in Guyana. Last year, Occidental acquired privately held CrownRock in a cash-and-stock deal.
Stewart Glickman, senior equity analyst at CFRA, said that during the recent wave of mergers and acquisitions, the U.S. oil and gas industry has preferred to grow organically by acquiring portfolios of other companies rather than spending more money to drill new Wells.
Matt Willer, managing director and partner of Capital markets at Phoenix Capital, said oil producers realize that oil and gas may not disappear and are racing to make up for lost investments in the past. The oil industry has experienced more than a decade of underinvestment due to the green transition, leading to the current wave of mergers and acquisitions.
Spending on mergers and acquisitions by US oil and gas companies rose to $234bn last year, the largest amount since 2012, according to the US Energy Information Administration. A Dallas Fed survey showed the industry expects more M&A activity in the next two years.
