Mergers and acquisitions in the U.S. shale oil and gas industry could lead to lower production, industry executives said at the Dallas Fed’s latest energy survey.
Survey respondents said the decline would not be particularly significant, but it would represent a reversal of a trend that most observers of the U.S. oil industry consider to be irreversible and consistent over the long term in the absence of restraint policies.
Consolidation among E&P companies has led to reduced investment in exploration. “We are hopeful that this temporary situation will resolve itself once consolidation is complete,” one survey respondent said, commenting on the current state of the industry.
But it may not be temporary: “Mergers and acquisitions over the past few years have reduced activity in the oil industry. Big oil companies are not going to deplete their reserves to boost domestic production until the demand and supply curve hits its target,” said another industry executive.
As many shale industry observers have warned since the 2022 surge in oil prices and the associated record profits kicked off a wave of mergers and acquisitions, big oil companies aren’t constrained by the pressure to pay down loans or the need to stay profitable. “They don’t need to participate in treadmill drilling to keep revenues up at the pace they can develop reserves and pay down loans,” the industry executive told the Dallas Fed survey.
Related: U.S. oil and gas drilling activity plummets
In fact, shale production growth is already beginning to slow. In April, the Energy Information Administration reported that the number of wells drilled but not yet completed was increasing. Also, crude oil prices in April were much stronger than they are now, near $90. But when the DUC count increases, the most common reason is that drillers are slowing down and waiting for a more favorable price environment.
As the number of drillers decreases through mergers and acquisitions, fewer people are making production decisions that affect a larger portion of shale fields. That means the net effect on the market will be more pronounced, with fewer independents left to produce freely to take advantage of favorable prices.
Meanwhile, consolidation continues: Following ConocoPhillips’ acquisition of Marathon Oil and Crescent Energy’s $2.1 billion purchase of Silver Bow Resources last month, Dallas-based Matador Resources agreed to acquire Permian assets from EnCap Investments in a deal valued at $1.9 billion that will increase Matador’s total production by 25,500 barrels per day.
Consolidation continues. The pool of production decision makers in exploration and production is shrinking. This has an impact on production planning, but it is not the only one that is affected.
“Consolidation is currently the primary driver of change in the industry,” one respondent to the Dallas Fed Energy Survey said, commenting on the oilfield services sector. “Many competitors are highly consolidated in their operations and customer bases,” he added. “When consolidation occurs, acquirers often do not buy existing service companies. Once separated, these companies are looking for a way to survive and are often willing to work at negative margin rates and do whatever they can to fund fixed-term costs.”
So it seems like the consolidation movement in E&P is not necessarily a boon for the oilfield services sector and things could get pretty tough for the sector. Alternatively, oilfield service providers may join the consolidation trend to survive. At some point, they may be forced to do just that.
“There are too many equipment providers chasing too few E&P customers,” said another survey respondent. “Without consolidation among service and equipment providers, price competition will be catastrophic. It’s surprising that the FTC continues to approve these mergers, which will ultimately hurt the Permian Basin.”
What industry executives see in the oil fields is often subjective. There is room for error based on bias. But consolidation in the areas of exploration and production is anything but subjective. This is a fact, and the most likely consequence of this fact is tighter control of production by the remaining executives. As one executive pointed out in a survey commentary, these executives have no interest whatsoever in freely pursuing the expansion of production, and this is the only fact that really matters.
U.S. shale production may soon go from growth to stagnation, but it won’t be because drillers have run out of resources. It’s much more likely because drillers aren’t happy enough with oil prices to motivate them to increase production. After all, oil production is a business, not a sacred mission to prove U.S. resource power to the world. It would be good for more analysts and traders to remember that when forecasting the future direction of global oil prices.
By Irina Slav of Oilprice.com
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