Exxon Mobil is reportedly looking to make a major acquisition in the U.S. shale industry, which could spur further deal-making as other companies look to put their large cash reserves to work. Exxon has held preliminary talks with Pioneer Natural Resources about a potential acquisition, and has also discussed deals with at least one other company.
If the deal with Pioneer were to go through, it would signal a trend of consolidation in the Permian Basin, which is currently the hottest oil field in the U.S. Shale companies are facing dwindling drilling locations and are increasingly turning to acquisitions to extend their runway.
Investment bankers and analysts predict that conditions are ripe for a deal frenzy in the oil patch this year. The pace of mergers and acquisitions in the shale industry slowed after the pandemic hit and oil demand decreased, but there were still around 180 deals per year between 2020 and 2022, totaling around $59 billion annually.
Producers now have a lot of money to spend on making deals, thanks to Russia’s invasion of Ukraine last year which sent global oil prices soaring. The 10 largest U.S. shale companies made over $70 billion in profits in 2022, with Exxon earning $55.7 billion and Chevron earning $35.5 billion. Energy analysts and executives predict that the next wave of oil deal-making will be in the Permian Basin of West Texas and New Mexico. Exxon and Chevron favor the region for shale wells that produce quickly and don’t require long-term megaprojects that some investors fear will decline in demand in the future.
If a major oil company like Exxon or Chevron acquired a large Permian company, it could trigger a speculative boom, according to investment firm Goehring & Rozencwajg. Exxon has invested heavily in the Permian and plans to increase its output there to 1 million barrels a day by 2027. However, as the region matures, companies are facing less productive wells and shrinking inventories of drilling locations, leading to incentives for mergers to gain new drilling opportunities and create economies of scale.
Inflation is also prompting producers to pursue deals, as the rising costs of labor, steel, and equipment have increased spending without reaping additional barrels. Nabbing a competitor allows drillers to increase production while keeping costs under control. While oil-price volatility has complicated deals in recent months, the U.S. oil benchmark has dropped to $70 to $80 range, which supports negotiations between sellers and buyers.
However, some analysts warn that consolidation in the Permian could lead to a slowdown in activity there, as public companies—the most likely acquirers—have been more conservative with their drilling programs than private operators.