A wave of mega-mergers is rocking the oil industry. Hess (HES) shareholders approved Chevron’s (CVX) massive $53 billion acquisition of the company, while ConocoPhillips (COP) is preparing to acquire Marathon Oil (MRO) in a massive $17.1 billion stock deal. Joining Market Domination to discuss the oil industry’s outlook amid this wave of consolidation are Sarah Hunt, founding partner at Alpine Saxon Woods, and Stewart Glickman, energy equity analyst at CFRA Research.
Hunt stressed that the entire industry is “under huge pressure” as it pivots to alternative energy sources. “I think this is all about consolidation into fewer players in a very mature industry that’s not expected to last forever,” he told Yahoo Finance.
But Glickman doesn’t see the Conoco deal as “transformative,” suggesting the company is on the defensive. With the Permian Basin creating headwinds for oil production, Glickman argues that by acquiring Marathon, Conoco will reduce its exposure to the basin, ultimately benefiting the company. “If you’re going to grow, it’s better to grow by acquisition than by putting a lot of money into new capital expenditures,” he added.
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Video Transcript
Oil and gas consolidation continues today.
Like when Phillips announced a deal to buy Marathon Oil.
The news comes after shareholders voted to approve a $53 billion merger with Chevron, with deals underway in the sector.
We’re looking at how to use the Yahoo Finance playbook to get a fuller picture.
Joining us now is Sarah Hunt, founding partner and chief market strategist at Alpine Sa and Woods and ST Click CFR, research analyst and deputy research director for energy equities.
I’m very pleased that we were able to meet again.
Now, let me tell you about another big event in the industry.
So let’s start with ConocoPhillips and Marathon.
Well, you know, anytime I see a big move like this, the first thing I ask is, is this defensive or offensive at this point? I want to start with you, Sarah, are you the buyer in this deal and on either side?
So I say yes, because it is both offensive and defensive.
I think there is now a view among major oil companies that they would be better off integrating the service side as well.
And with everyone talking about moving to alternative energy, the whole industry is under a lot of pressure.
And the reality is, I think fossil fuels are going to be a part of our lives for a long time to come.
However, investor perceptions are shifting.
It’s true that on the bank side, you could always borrow money to drill in the past, but now there is a lot more capital discipline.
I believe this is a case for consolidation to fewer players in a very mature industry that is not expected to last forever.
Stuart.
Come here to hear your thoughts on this deal.
Does that make sense to you, Stuart?
Well, financially and strategically.
Do you think this will be transformative for Kono Stewart?
Ah, yes.
Hi Josh, thanks for the invite.
So, I don’t think this will be a game changer for Connick O. I think it will be primarily a defensive play.
Well, the company has significant exposure to the Permian Basin thanks to its 2021 acquisition of Concho Resources.
And I think there’s a concern within the industry about maybe being able to get more oil out of the ground.
And the Permian exceeds the capacity to transport them out of the region by pipeline, which creates basis risk.
So I think the acquisition of Marathon will give us growth, more exposure to Eagle Fertilizer, more exposure to the Bakken and therefore less exposure to the Permian.
However, I agree that the industry is not necessarily growing rapidly.
This is a mature industry, it’s ripe for consolidation, and I think capital discipline is definitely there.
So if you’re going to grow everything, you’re better off growing through acquisitions than putting a lot of money into New Cap XA drill bits.
Well, folks, one of the areas that is seeing growth is Guyana’s oil and gas production.
Well, one of the core areas of this Chevron Hess acquisition is getting HES shareholder approval, but that’s just the first step, right?
There are still some areas of contention about the Exxon deal, so let’s start with you on that, Stuart.
What do you think will happen?
Yeah.
The problem is that the joint operating agreement has not yet been made public.
So is it hard to know which lawyer is right?
Is it Chevron’s lawyers or Exxon’s lawyers?
Exxon claims to have first purchase rights over the project, which is clearly a crown jewel for Guyana, and without the exposure to Guyana, that would not be possible.
I’m not sure Chevron is particularly interested in the rest of him.
Well, that’s the only exception I would say, uh, you know, the lower 48 states are very mature and integrating Guyana as an independent project would probably result in a lot of additional oil being pumped out by the end of the decade, but it’s too early to say who’s right.
Yes, and win in arbitration court.
Sarah, one more question for you: This consolidation that we’ve seen, do you think we’ve reached a zenith or will it continue?
And if that continues, who do you think are the companies that remain that you think would be potentially attractive acquisition targets? We’re going to hear, for example, Devin’s name.
Well, I think we’ll have to wait and see how this plays out, because there’s already been antitrust attention in this space and in some of the mergers that have already been proposed.
So we’ll have to wait and see how that goes.
I think any small business, any EMP company, if you look at the gaps in the market, you can see which companies are likely to be acquired.
I think Devin has been talked about as a chorus rather than an acquisition target, but it’s hard to say because anything can happen in this industry after a certain period of time. Of course, it depends on what other companies and other players in the industry are doing. Nobody wants to be so small that they can’t compete with the big guys.
So I think that’s going to continue. Sarah, to paraphrase exactly what you said, if we could pull up that screen again, the transactions would be listed. Most of the transactions are still pending.
It’s the fact that it’s the largest company on this list, aside from Exxon Pioneer.
Got it, Sarah.
Do you think the rest of us are likely to get it too?
Yes, Chevron has its own issues, but will they get antitrust approval?
Well, this is questionable. This is also questionable for the Marathon-Kono deal because of some of the adjacent land.
But ultimately, I think it was a positive that Exxon was able to do that, but on the other hand, it’s also fair to say that now that it’s done that, Exxon doesn’t want to consolidate any more.
This then creates problems for some others.
I guess we’ll have to wait and see how it plays out.
And, you know, this is a mature industry, but I think there’s an argument to be made that when these companies merge, it changes the price of gas.
At the gas station.
In fact, the situation is much more complicated than that.
So for those who know the industry well, it’s not very convincing.
But I think there are some things to digest here as these companies try to get themselves together.
And finally, Mr. Stewart, what do you think about Exxon? Exxon wraps up its annual shareholder meeting today, and your allies struck a deal with the oil giant against an ongoing battle with activist investors.
What did you think?
Well, Exxon’s directors were reapproved, not as high as they were before, but still a large majority – over 90% – and every shareholder resolution that was filed was rejected.
I think what this suggests is that even if institutional investors don’t like Exxon’s combative approach to shareholder proposals, they are generally happy with the financial results and 2023 should be a very strong year for Exxon relative to history, although not as strong as 2022.
And I think that ultimately led to victory.
Now, Sarah, I just wanted to ask you just a little bit about this, I know you’re all Exxon shareholders, what do you think about Exxon’s strategy and the fact that Exxon has really resisted attempts at shareholder activism, particularly from various climate groups and investors?
Well, in terms of Exxon, we are actually shareholders in Comic Con.
We are also Chevron shareholders.
But I can see both sides to this and I think they will argue both sides.
right.
They will say there are too many pointless lawsuits and pointless actions, it’s costing them money, and they have to do what needs to be done.
And on the other side, there is no way to get us in.
So we can tell you, our shareholders, what our priorities are.
So I think there was probably abuse on both sides.
I think at this stage we should go after them.
You also go after them in the series from a space of strength and say, “I’m not a racist.
We’ve had a great few years, and we’re not going to allow you to come in here and add these charges and all these other lawsuits to our stockholder proxy votes.
Well, how that will ultimately be resolved.
I don’t really understand.
But among these, some people will come in with only a small amount of equity and try to make a big fuss.
In some cases.
If you get an overwhelming response, then the other party will surely take notice.
If we hear from enough shareholders that they want to consider the full extent of the fact that some of these shareholders’ original proxy questions were about Sarah Stewart;
It was so good to see you again.
thanks so much.
