Mergers and acquisitions in the U.S. shale oil and gas sector could lead to a decline in production, industry leaders said in the latest edition of the Dallas Fed Energy Survey.
The decline would not be particularly pronounced, according to the survey participants. Nevertheless, it would be a reversal of a trend that most observers of the US oil industry see as irreversible and stable in the long term unless there are restrictive policies.
Consolidation among E&P companies has limited investment in exploration. “We hope this is a temporary situation that will resolve itself once the integration is complete,” said one survey respondent, commenting on the state of the industry.
However, it does not have to be temporary. Another industry executive says: “The mergers and acquisitions of recent years have reduced activity in the oil business. The major oil companies will not tap into their reserves to increase domestic production until the supply and demand curves meet their targets.”
As many shale oil sector observers have warned since the start of the merger and acquisition wave following the 2022 oil price surge and the resulting record profits, major oil companies are not constrained by the pressure of loan repayments and the need to stay in the black. “They don’t need to be on the drilling machine to keep their revenues at a level that allows them to tap reserves and repay loans,” this industry executive told the Dallas Fed Survey.
Related: Oil and gas drilling activity in the US collapses
In fact, production growth in the shale oil patch is already slowing. In April, the Energy Information Administration reported that the number of wells drilled but not yet completed is increasing – and oil prices performed quite well in April, closer to $90 than they are now. But when the number of shale oil wells increases, the most common reason is that drillers are holding back and waiting for a more lucrative pricing environment.
As the number of these drilling companies decreases as a result of mergers and acquisitions, there will be fewer people making production decisions, and those decisions will affect a larger portion of the shale oil fields. This means that the impact on the market will ultimately be more severe, with only a few independent companies left to pump at will and take advantage of any favorable price movement.
Meanwhile, consolidation continues. After ConocoPhillips closed a deal to acquire Marathon Oil last month and Crescent Energy bought SilverBow Resources for $2.1 billion, Dallas-based Matador Resources agreed to buy Permian assets from EnCap Investments. The deal is valued at $1.9 billion and will increase Matador’s daily output by 25,500 bpd.
Consolidation continues. The pool of decision-makers in exploration and production is shrinking. This affects production plans, but not only them.
“Industry consolidation is the main driver of change in the industry right now,” said a Dallas Fed Energy Survey respondent of the oilfield services sector. “Many competitors are extremely consolidated in their work profile and customer base,” he added. “As consolidation occurs, the acquiring company often does not acquire the existing service companies. Once they break away, these companies look for a lifeline and in many cases are willing to operate at negative margin rates and do whatever they can to save money on fixed costs.”
So the consolidation trend in E&P is not exactly a boon for the oilfield services sector, and it sounds like things could get pretty tough for that sector. Or the oilfield services companies could join the consolidation trend in order to survive. At some point, they might be forced to do so.
“Too many equipment suppliers chasing too few E&P customers,” said another survey respondent. “Without consolidation among service or equipment suppliers, there will be a race to the bottom on prices. The continued approval of these mergers by the Federal Trade Commission is surprising and will ultimately hurt the Permian Basin.”
What industry executives see in the oil field is often a subjective picture. There is a certain margin of error. But consolidation in exploration and production is anything but subjective. It is a fact, and the most likely consequence of that fact is tighter control of production by the executives of the remaining players. These executives, as one executive noted in a comment to the survey, have no interest in increasing production at will, and that is the only fact that really matters.
U.S. shale oil production may soon slide from growth to a plateau, and not because drillers have run out of resources. Far more likely, those drillers aren’t happy enough with the price of oil to motivate an increase in production. Oil production is, after all, a business, not a sacred mission to prove America’s resource might to the world. It would serve them well if more analysts – and traders – kept this in mind when making assumptions about the future path of global oil prices.
By Irina Slav for Oilprice.com
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