Oil Mergers Are Taking Off. These Stocks Stand to Win or Lose.

ConocoPhillips’ $22.5 billion acquisition of Marathon Oil is just the latest in a string of major deals reshaping the energy sector. However, not all companies will benefit equally from this trend.

Small and midsize oil and gas producers could be the winners, as they may attract attention from potential acquirers and experience a surge in their stock prices. On the other hand, oil services companies may be the losers, as their customers are being swallowed up by larger players, potentially leading to slower growth in the services industry.

The decline in rig count, a reliable indicator of oilfield activity, further highlights the challenges faced by the services sector. According to Baker Hughes, the number of rigs in the US has dropped from 711 a year ago to 600 currently.

Given the ongoing wave of mergers and acquisitions, it is likely that this trend will continue. Mark Viviano, portfolio manager at investment firm Kimmeridge, commented, “The horse is out of the barn on M&A, and we expect the arms race for scale to continue.”
Mergers and acquisitions (M&A) in the energy sector typically occur during periods of low prices, allowing larger companies to acquire smaller ones at discounted prices. Despite current high prices, industry analysts believe the conditions are still favorable for consolidation. Investors are urging companies to expand their size and oil reserves, but they are wary of risky exploration projects that require significant investment. M&A provides an alternative strategy for acquiring proven reserves with lower risk compared to drilling new wells.

As a result of the recent surge in takeout premiums for acquired companies, smaller energy firms are experiencing a boost in their valuations. For instance, Permian Resources has witnessed a significant 72% increase in its share price over the past year, largely due to analysts speculating about its potential as an acquisition target.
Since October of last year, energy mergers and acquisitions have taken center stage. Exxon Mobil and Chevron made headlines with megadeals each worth over $50 billion. Since then, other notable acquisitions have been announced by Chesapeake Energy, Occidental Petroleum, and Diamondback Energy. As a result, the pool of available acquisition targets is shrinking, making smaller U.S. producers more appealing. Analysts have identified Permian Resources, Matador Resources, HighPeak Energy, Range Resources, Antero Resources, and Comstock Resources as potential targets.
However, the wave of mergers and acquisitions is not good news for other types of companies. Oil services firms play a crucial role in assisting oil and gas producers in drilling new wells and extracting resources. When their customers engage in consolidation activities, it often results in reduced demand for these services, as some services companies have highlighted in recent earnings calls. Major players in the North American market include SLB (formerly known as Schlumberger), Halliburton, and Liberty Energy.

SLB CEO Olivier Le Peuch attributed the “soft” results in North America to consolidation during the company’s latest earnings conference call. On the other hand, the CEOs of other prominent oil service companies hold a more optimistic view. Chris Wright, CEO of Liberty Energy, acknowledged that consolidation may lead to a slight decrease in activity. However, he believes that Liberty will emerge as one of the winners in this scenario, as its clients are more likely to be buyers rather than sellers in merger and acquisition transactions. Wright stated, “It’s been a small headwind for the industry and maybe a very small tailwind for Liberty.”
Halliburton, a prominent player in the North American oil services sector, has expressed a positive outlook on the current trend. CEO Jeffrey Allen Miller stated last year that he believed industry consolidation would have a positive impact on Halliburton’s overall performance. According to Miller, larger oil producers tend to continue drilling regardless of market conditions, unlike their smaller counterparts. Therefore, if major companies acquire smaller ones, it is expected that the oil services business will become more reliable and steady.