Big oil mergers promise greater stability

The recent series of mergers and acquisitions of independent oil companies by major companies has reshaped the energy industry for the better in the Permian Basin.

Odessa oilman Kirk Edwards, State Rep. Brooks Landgraf and Waco economist Ray Perryman say one of the big benefits will be more stability in the oil and natural gas markets as the major companies prove much less reactive to price fluctuations than the independents always were.

Starting last fall and continuing through the spring, ExxonMobil bought Pioneer Natural Resources for $60 billion, Chevron merged with the Hess Corp. for $53 billion, Diamondback Energy obtained Endeavor Energy Resources for $26 billion and Occidental Petroleum acquired CrownRock Operating for $12 billion. ConocoPhillips bought Concho Resources for $13.3 billion in 2020.

“To me the consolidation that has taken place in the Permian over the last few years from the major independents going into the major oil companies can only spell good news for the Permian Basin economy ahead,” Edwards said. “The reason is that these majors make their budgets not just for 12 months ahead but for decades to come.

“They deal with price fluctuations much better than the independents do as usually the majors are also involved in downstream energy such as refining and then distribution. When one side of that equation is lower the other pieces are usually doing well and vice versa.”

What that means, Edwards said, is that the majors specify how many rigs and frac crews will run for a year or two and stick with that schedule no matter what pricing is doing.

“That creates stability in the market and it will certainly be celebrated by the service companies and communities that are so affected by their scope of work,” he said.

Landgraf, an Odessa Republican who chairs the House Environmental Regulation Committee in Austin, said it is reasonable to expect oil and gas prices to experience more stability following the wave of mergers and acquisitions.

“Due to a myriad of factors including tighter financial constraints, small oil companies are extremely responsive to price fluctuations,” said Landgraf, who represents Ector, Ward, Winkler and Loving counties in the 81st Representative District. “When oil prices rise production dramatically increases, which in turn pushes prices down.

“Conversely when oil prices fall, small oil companies drop production, causing prices to shoot back up again. While price and production volatility are part and parcel of this industry regardless of the size of oil companies, the existence of many small companies can exacerbate these fluctuations.”

In contrast, the representative said, larger companies are much less responsive to short-term price changes.

“This allows them to maintain more stable and consistent production levels,” he said. “With these mergers and acquisitions there are now fewer small producers and the large companies have expanded. Accordingly I expect oil and gas production and prices to fluctuate less.

“With greater price and production stability we will likely see more employment stability as well. Oilfield labor tends to balloon when production surges and pop when production is curtailed.

“If oil and gas flow at a more constant rate, these employment swings will be less frequent and less severe.”

While the mergers and acquisitions will provide a more predictable environment for producers, workers and consumers, Landgraf said, “I still want independent operators with a wildcatter spirit to have the opportunity to start up and grow in the industry.

“Fortunately I believe the consolidation of larger companies has not done anything to diminish that opportunity.”

Perryman said the increased concentration of resources in the Permian Basin is first and foremost a testament to industry leaders’ recognition that there will be strong demand for the area’s oil and gas in the coming decades.

“Drilling programs always have been and will continue to be based on the economic aspects of the potential wells and overall market conditions,” Perryman said. “Anticipated costs and potential revenues and therefore projected profit streams are essential to drilling decisions.

“To the extent that mergers could affect these economics such as through enabling lower costs, they could change drilling patterns. In addition the newly merged firms might have different priorities than were in place prior to the merger.

“The larger firms have a tendency to develop long-term drilling and capital allocation programs and communicate them to the financial market through their standard disclosure process. Having said that they also make changes rapidly to adapt to changing conditions.”

Perryman said he therefore expects somewhat greater predictability with the greater presence of major players in the region but that some degree of volatility will certainly remain.

“In many cases a drilling program that made sense before the mergers and acquisitions is likely to make sense afterwards,” he said. “It is worthy of note that while the Permian Basin is obviously a major production area, firms operating there remain ‘price takers,’ meaning that they do not have the ability to single-handedly shift prices in the large and complex international energy market.

“Global markets, production and supply and demand conditions are going to remain the primary determinants of oil prices and production decisions. The increased concentration should produce somewhat greater stability in regional activity, but oil and gas markets are volatile by their very nature and subject to policy issues, geopolitics and production priorities through the world.”