Big Oil is shrinking as its options contract.
Breathless reporting and market analysts trumpet takeovers in the oil and gas sector as something positive, but those doing the taking over can tell them that it is all defensive, not expansionary.
It is cheaper to buy than drill—especially now, with demand starting to slow in what will be a long-term decline.
The pandemic gave the sector an enormous wake-up call—companies large and small were forced to write down asset values, slash costs across the board, and hunker down. The cost-cutting lessons haven’t been forgotten, especially in the US shale business, and especially in the highly productive Permian Basin in West Texas and Southwest New Mexico.
More oil is being produced now in the US from fewer rigs than at any time before; productivity is real, cost controls still real, and mergers and acquisitions are the fastest way to grow reserves and, at least, look to be controlling costs.
Midweek, the latest shoe fell in the sector when ConocoPhillips agreed to buy Marathon Oil in an all-stock deal worth $US22.5 billion, including about $US5.4 billion of debt.
That saw the value of Conoco fall 3% to around $US134 billion, while, naturally, the shares of the target, Marathon, jumped 8.4% to just over $16 billion.
This deal came a day after shareholders in Hess Corporation narrowly okayed the takeover/merger approach from Chevron with around $US53 billion in shares.
This one, though, looks headed for the courts over a preemptive rights brawl with Exxon Mobil over a stake in the hottest oil field in the world in the past decade—offshore Guyana in the Caribbean.
But there’s also ExxonMobil’s $US60 billion purchase of Pioneer as well as Occidental buying CrownRock and Diamondback Energy acquiring Endeavor Energy Partners in multibillion-dollar cash-and-stock deals.
Why Marathon (which used to be part of the Standard Oil company until 1962)?
Well, cash and reserves.
ConocoPhillips says it is targeting savings worth $US500 million within the first full year of the transaction closing, which is expected in the fourth quarter of this year pending the approval of Marathon shareholders and regulators.
The merged company (according to Conoco) also plans to repurchase over $7US billion in shares in the first full year, and over $US20 billion in the first three years.
But these companies are not expanding—in many cases, they are buying barrels to replace depleted oil reserves already held—with inflation as it is and relatively high oil prices, the shares in some of these giants are at high levels and cheaper to buy existing assets than drill and develop, except when a discovery as rich and large as the huge fields the Exxon-led consortium have found offshore Guyana in the Stabroek Block. Seventeen discoveries, the last the first one with associated gas. Hess has a 30% stake in the Stabroek Block, while Exxon leads the development with a 45% stake. China National Offshore Oil Corp. holds the remaining 25%. Chevron claims that by taking over Hess, it gets the stake in the Stabroek discoveries.
Exxon (and quietly, China National Offshore Oil agrees) says nothing of the sort because there are preemptive rights that give it (anyway) a right of refusal over the Hess holding.
Exxon filed for arbitration in March to defend the rights it claims under the joint operating agreement. Chevron and Hess have told investors the pending deal would terminate if Exxon prevails.
This argument looks like going to arbitration next year, so ownership of this prospect won’t be settled for more than 12 months, and presumably nor will the Hess takeover close either.
Exxon, in fact, filed for arbitration in March to defend the rights it claims under the joint operating agreement. Chevron and Hess have told investors the pending deal would terminate if Exxon prevails.
Hess said Tuesday that the deal’s completion depends on the resolution of the arbitration proceedings. The companies are working to complete the merger “as soon as practicable,” whenever that is.
The discoveries have the potential to help Exxon and Hess/Chevron continue to replace depleted reserves for years to come—it's so large. That makes Hess far more valuable for Chevron—it allows Chevron the room to continue in gas and in shale in the US (and in countries like Australia with its WA LNG interests) and not spend all that much on exploration and development.
That, in turn, will give it the freedom to return more capital to shareholders via buybacks and dividends.
In 2023, Chevron spent $US14.9 billion buying back shares (32% more than in 2022) and $US11.3 billion on dividends (3% higher than in 2022). Combined, that's $US26.2 billion or just under 8% of the company’s market value of $US289 billion.
Warren Buffett’s Berkshire Hathaway owns 6.1% of Chevron and loves companies that earn a lot of cash and reinvest it via buybacks and high dividends—it's why he’s still invested in Apple, as well as Bank of America and Coca-Cola, for example.
Buffett is also the biggest shareholder in Occidental Petroleum, which is worth $US54 billion. Berkshire owns 27.7% and has effectively taken the company off the market.
