- The US oil boom is set to fade because of an M&A bonanza.
- Public companies are buying up private oil firms responsible for a blockbuster 2023 for US oil.
The US oil boom was a major story for energy markets in 2023, and the record output from American producers caught many by surprise.
But don't expect this year to be a repeat, energy experts say, and there's one big reason why US supply could be crimped: M&A.
In 2024, there has already been $55 billion worth of merger deals announced in the oil and gas exploration sector, according to analytics firm Enverus. In 2023, there was a total of $190 billion worth of mergers and acquisitions announced, the highest on record for the sector.
That's a game changer for US oil production growth.
Driving last year's oil boom was growth from private companies, like Endeavor Energy Resources and CrownRock. The top five privately held oil exploration and production companies (E&Ps) have represented a combined third of annual Permian crude production growth on average since 2019, according to Rapidan Energy.
Then the tides began to shift. Last year, ExxonMobil announced it was buying Pioneer, a move that would give it access to a major chunk of US oil inventory in the Permian Basin. Shortly after, Chevron said it was buying Hess. This year, Diamondback has announced it is buying Endeavor, and Occidental is set to acquire CrownRock.
With larger public companies cannibalizing private operations, US oil production growth is expected to flatten.
"The core drivers behind last year's production surge – private E&P output growth, improved drilling and completion efficiencies, and a rapid drawdown of drilled but uncompleted (DUC) wells – are unlikely to repeat, leading to a deceleration in growth this year," Rapidan analysts said in a note last month.
Unlike the US's crude oil production growth of 1 million barrels of oil a day last year, Rapidan forecasts that slowing to 300,000 barrels per day in 2024.
Diamondback's deal to buy Endeavor is expected to shift one of the last large private sources of Permian acreage — the epicenter of the oil boom — into the hands of a public company. According to Morningstar, Diamondback and ExxonMobil now control about 50% of the Midland side of the Permian Basin.
Public and private companies have very different financial priorities.
"Public firms are largely seeking to cut costs, reduce drilling activity, and maximize returning cash to shareholders," a Morningstar oil outlook report stated. "This is in sharp contrast to private entities, which were far more focused on growth over the past few years since they did not have to deal with public shareholders."
That has implications like reducing the number of oil rigs, Morningstar analyst Stephen Ellis explained.
"They're going to cull the number of rigs that are drilling some of the least-profitable, lowest-return type wells that might have been efficient for a private producer to produce, but wouldn't necessarily meet a US public producer's standards," Ellis said.
It's a principle followed by many large companies, known as "capital discipline," which means focusing less on output volume and prioritizing bang for the buck.
Take the example of Endeavor, an oil company that has added 100,000 to 200,000 barrels of oil a day to oil output on average since 2019.
"Diamondback, who has followed capital discipline, who has committed to that strategy, who has kept production growth low while return cash to shareholders — that 200,000 barrels a day that they acquired will hypothetically fall under that capital discipline strategy," Hunter Kornfeind, a Rapidan Energy oil analyst, said.
In a letter to shareholders on Feb. 20, Diamondback wrote that it plans to keep 2023 fourth-quarter oil production flat with less capital than last year, emphasizing their "commitment to capital efficiency and 'value over volumes.'"
Unlike private companies, public firms have to care about things like dividends and stock prices. So while a private company could ramp up production when oil prices are high, public companies don't have the same leeway.
"These wildcat private producers that have been just ramping up production because WTI [crude oil] has been $80 to $120 over the past three years, can't do that anymore," Kornfeind said.
The wave of M&A has drawn scrutiny from Democrats in Congress. This week, 50 lawmakers led by Chuck Schumer have called on the FTC to investigate the dealmaking boom in the sector.