- The takeover of smaller Permian players by large publicly traded companies could slow down production growth.
- The booming activity in mergers and acquisitions from 2023 has led to a growing number of smaller privately held companies being absorbed into large corporations.
- Growth at all costs is preceded by shareholder returns, share price performance, and debt reduction, leading to slower drilling activity.
Some private oil producers in the Permian will hit the brakes on output growth as they have been acquired by large publicly traded companies, which now value returns to shareholders more than production increases at all costs.
The booming activity in mergers and acquisitions (M&As) from 2023 has led to a growing number of smaller privately held companies being absorbed into large corporations, which answer to shareholders and look to reward investors.
As a result of this trend, production growth in the top U.S. shale basin, the Permian, is set to slow down this year to the lowest pace of output increases since 2021, market participants have told Reuters.
Merger Mania
Analysts and industry executives expect the consolidation drive that began in 2023 to continue this year, with the potential of more mega-deals of the scale that Exxon-Pioneer and Chevron-Hess announced at the end of last year.
Industry executives of companies active in the Permian expect more large-size deals to be announced in the coming months, according to the latest Dallas Fed Energy Survey.
Of the 122 executives responding to a question in the survey, 77% said they expect more acquisitions of $50 billion or more to occur in the next two years.
Rethinking inventory in the U.S. shale patch is currently one of the top themes in the global upstream sector, Fraser McKay, Head of Upstream Analysis at Wood Mackenzie, wrote last month.
Shale operators could look to counter the trend of gassier, less oil-rich wells in the second half of the decade by acquiring additional high-quality locations now, according to McKay.
“However, the scarcity of viable acquisition targets is a growing issue. With demand for quality inventory making M&A increasingly expensive, many exploration and production (E&P) firms may be considering potential deals long before they have a need for more well locations,” McKay said.
As early as October 2023, after Exxon and Chevron announced their respective mega deals, Enverus Intelligence Research (EIR) said that “the moves by ExxonMobil and Chevron are likely to ignite further consolidation among smaller oil and gas companies as they scramble to remain competitive and secure remaining drilling opportunities.”
The large independents are also likely to consider acquisitions, targeting smaller and mid-size producers, according to Enverus.
Dividends over Drilling
The Permian is becoming more consolidated, and drilling locations are becoming an inventory item of larger public producers. More private drillers—who have been driving shale output growth in recent years—are now acquired by bigger firms, where growth at all costs is preceded by shareholder returns, share price performance, and debt reduction, leading to slower drilling activity.
“The publics are not drilling as much as they could,” Michael Oestmann, CEO at Midland-based producer Tall City IV, told Reuters.
“Their investors now require a certain amount of cash be returned to them instead of invested in new drilling,” Oestmann added.
Tall City, then named Tall City Property Holdings III LLC, was acquired last year by Vital Energy as part of three transactions in which Vital Energy added resources and scale in the Permian.
Significant Slowdown?
U.S. crude oil production growth is slowing down, analysts and forecasters say. Some, like the EIA, are highly conservative in their forecasts.
Just this week, the administration said in its Short-Term Energy Outlook (STEO) that U.S. oil production fell to 12.6 million barrels per day (bpd) in January because of shut-ins related to cold weather, down from an all-time high of over 13.3 million bpd in December. The EIA expects U.S. oil production will return to almost 13.3 million bpd in February but then decrease slightly through the middle of 2024 and will not exceed the December 2023 record until February 2025.
Annual U.S. oil production will grow from 12.93 million bpd in 2023 to 13.10 million bpd this year and 13.49 million bpd next year, show the EIA’s latest estimates, which were revised down from previous forecasts.
In the short term in the shale patch, only the Permian is expected to boost oil production in February compared to January, but by just 5,000 bpd—the smallest expected monthly growth since July last year, per EIA’s latest Drilling Productivity Report.
The EIA’s estimates of flatlining U.S. oil production this year may be too conservative. Other analysts and forecasters, including OPEC, continue to expect growth, albeit not as strong as the surprisingly steep increase from last year.
U.S. oil output could surprise to the upside this year, too, some analysts say, noting that the plans of the two supermajors, ExxonMobil and Chevron, envisage a boost in Permian production.
Chevron said last week that its worldwide and U.S. net oil-equivalent production set annual records in 2023. Worldwide production rose by 4% from a year ago, primarily due to the acquisition of PDC Energy and 10% annual growth in the Permian Basin production.
This year, Chevron targets another 10% increase in its Permian production.
“We are in the best parts of the Permian,” CFO Pierre Breber told Bloomberg in an interview.
“Our growth is higher likely than the basin average but it is representative of our activity level and the activity level of our partners,” Breber added.
ExxonMobil, for its part, looks to always have drilled but uncompleted wells (DUCs) available in the Permian to allow it to be flexible with production if it runs into an issue in the immediate vicinity, CEO Darren Woods said on the earnings call last week.
ExxonMobil has reached an optimized level of inventory “that allows us to keep a very efficient, I’d say, manufacturing process running versus a focus on production and production process,” Woods added.
