- This year has seen a flurry of oil mega-mergers worth more than $100 billion.
- Big deal flow and rising US production point to industry forecasts of big demand for years to come.
A string of multi-billion dollar mergers and acquisitions across the energy sector this year has coincided with a boom in US oil production, and together the trends point to an industry shrugging off peak oil demand concerns, with expectations of a healthy market for years to come.
Deals for companies active in the Permian basin, a key drilling region that stretches over a swath of west Texas and into New Mexico, have exceeded a record $100 billion in 2023, consultancy Wood Mackenzie said in a report published December 12.
Exxon Mobil's $59.5 billion proposed deal for Pioneer Natural Resources — the largest oil and gas producer in the Permian basin — headlined those figures, in addition to Chevron's $53 billion takeover of Hess, and Permian Resources' $4.5 billion, all-stock acquisition of Earthstone Energy.
"Oil demand is expected to continue growing through the rest of the decade, hence consolidation in the US oil patch is a more measured approach to address this need via reduced costs and economies of scale," Matt Smith, lead oil analyst for the Americas at Kpler, told Business Insider.
That contrasts to the boom-and-bust approach and "wildcatting" — or exploratory drilling — of the past.
"Continued consolidation within the shale industry is inevitable," said Jesse Jones, head of North America crude production at Energy Aspects.
Jones told Business Insider oil production from private producers has ramped up faster than that of public companies over the last three years, and US oil production broadly has exceeded estimates.
This year, the US has averaged 13 million barrels a day of output. Some analysts have forecasted that will increase in 2024. US production hit a record 13.2 million barrels a day in September, which happened as OPEC+ leaders like Saudi Arabia and its allies like Russia struggled to get a handle on oil's recent downward spiral.
"Upstream consolidation gradually ratchets down the growth potential from areas like the Permian, which is one reason we see US growth slowing appreciably next year," Jones said. "But that should also result in healthier financial results over time as a larger portion of the operator universe is incentivized to exercise capital discipline."
More confidence in demand than IEA
International Energy Agency executive director Fatih Birol in September forecasted the beginning of the end for global crude demand, but the oil and gas industry has effectively bet on the opposite.
A JPMorgan commodities strategist this week said demand for oil in emerging markets is vastly underestimated, and peak oil demand won't be seen in our lifetime.
Jim Mitchell, head of Americas oil analysts for Refinitiv, said the surge in deal-making means corporations expect oil to be a major source of energy for a long time, and US firms are growing at a rate that allows them to compete on a bigger scale.
"For the biggest of oil and gas companies, the mergers mean they can compete on the world stage with oil companies owned by nations," Mitchell told Business Insider. "For the mid-size and smaller oil and gas companies, the mergers give financial health in an environment where financing will continue to be difficult."
The pace of merger and acquisitions next year will likely cool, in his view, but the oil market will remain strong.
"We're seeing big players buying up smaller companies, as it is an easy way for them to add incremental production to their books," Kpler's Smith said. "It's also an efficient way of them snapping up tried and tested assets and acreage."
Meanwhile, notwithstanding recent declines in crude prices, Mitchell highlighted that a prolonged run of relatively higher prices has helped heal balance sheets from the "financial bloodbath that was COVID," and provided capital for investments or returning money to shareholders.
"My opinion," Mitchell said, "is that both the consolidation and the oil boom suggest demand will remain high and increasing at least through the remainder of this decade."