Big Oil Firms Seen Dominating Energy Deals

Analysts expect big energy companies to play a major role in deal-making during another solid year for oil and gas mergers and acquisitions.

Oil majors and large independent drillers need to shore up their asset portfolios after several years of underinvestment during a price slump, analysts say. Buying up acreage and acquiring rivals is a quick way to lock up future production as old wells dry up, CNBC reported.

Global deal-making in the oil and gas exploration and production segment reached $143 billion last year, the highest level since 2014, according to energy research firm Wood Mackenzie.

In 2017, drillers mostly focused on consolidating their positions in a few core areas and selling off other assets. Many made purchases that allow them to string together strips of land, drill more efficiently and improve their cash flow.

That strategy will help producers pay for the big, transformational deals they made in 2016, aimed at overhauling their business to contend with low prices, said Curt Karges, who leads consulting firm PwC's corporate finance team in Houston, in a year-end report.

That year, drillers packed into the Permian basin in western Texas, where the cost of producing oil is low but the price tag on land — and the companies who own it — has skyrocketed.

Seeking Efficiencies of Scale

Amol Joshi, senior analyst at ratings agency Moody's, expects 2018's deals to be more strategic after a year of mostly tactical acquisitions and sales.

Integrated oil companies like Exxon Mobil and large independent drillers are prime candidates to make these deals, in part because they are typically able to hold assets for long periods and have flexibility when oil prices are relatively low, he says.

"Larger companies with strong balance sheets will seek efficiencies of scale in higher-return basins," Joshi said in a recent research note.

"Smaller companies with decades of drilling inventory at the current pace can create value by combining with larger producers to accelerate development."

Wood Mackenzie thinks British oil giant BP and French peer Total are likely buyers. BP's project pipeline is looking thin, it says, while Total needs to speed up its plans to acquire low-cost, long-life assets and shift towards natural gas production by 2035.

Exxon has a big war chest of its own stock, allowing it fund a takeover with shares. But takeovers might not be necessary because it has a strong long-term production stream and an established base in the US shale oil patch.

Chevron's cash flow is "radically improved" after two big Australian projects recently started up, but it's not yet clear whether new CEO Mike Wirth will give a green light to big deals.