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Energy players enter 'Shale 4.0' era as consolidations rise

Diamondback Energy (FANG) is set to acquire Endeavor Energy Resources in a merger deal valued at $26 billion, making Diamondback a major player in the Permian Basin — currently one of the most productive oil and gas fields within the United States. Consolidation in the energy space has rapidly accelerated in recent weeks.

Rystad Energy Senior Analyst Matthew Bernstein joins Yahoo Finance to discuss the energy sector and why he believes it has entered a new era of production.

Bernstein explains how companies arrived into the new era: "I think over the past several years since right before COVID, these operators have been able to prove that they can essentially live within their means or invest into a new development within their cash flow, so from the investor side and the shareholder side, you're seeing a bit more easiness and acceptance of things like taking on new debt in order to finance acquisitions because ultimately this shale 4.0 era will be defined by the need for scale for the long-term. And that's really the motivation behind all of these deals is really needing to scale up in terms of the acreage and the amount of drillable locations that you can have for the future."

For more expert insight and the latest market action, click here to watch this full episode of Yahoo Finance Live.

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Editor's note: This article was written by Nicholas Jacobino

Video transcript

RACHELLE AKUFFO: Welcome back. The size of megadeals in the Permian Basin have been rapidly accelerating the timeline of oil consolidation. Now, back in October of last year, ExxonMobil announced its $64.5 billion acquisition of Pioneer Natural Resources. And earlier this week, we caught wind of the latest merger-- Diamondback Energy and Endeavor Energy Resources.

Our next guest says we're entering a new era of unprecedented dealmaking for the shale sector. Let's bring him in now-- Matthew Bernstein, Rystad Energy Senior Analyst. Thank you for joining me in this morning. So walk us through what this shale 4.0 season looks like when you have these mergers continuing to come into play.

MATTHEW BERNSTEIN: Yeah. Thank you. Happy to be here. So yeah, kind of as you alluded to there, we really do see this as a new era in the shale sector. I think over the past several years, since right before COVID, these operators have been able to prove that they can, essentially, live within their means or invest into new development within their cash flow.

So from the investor side and the shareholder side, you're seeing a bit more easiness and a bit more acceptance of things like taking on new debt in order to finance acquisitions, because, ultimately, this shale 4.0 era will really be defined by the need for scale for the long-term. And that's really the motivation behind all these deals is really needing to scale up in terms of the acreage and the amount of drillable locations that you can have for the future, because, ultimately, this is a finite resource.

And there is a general consensus on oil demand, at least moving forward, for the next decade. So in shale 4.0, these companies are going to want to have the most scale in the most commercial areas. And, really, that is the core of the Permian Basin.

RACHELLE AKUFFO: And speaking of Diamondback and Endeavor, the Permian Basin, one of the most lucrative oil producing regions here. How much does that change the space here?

MATTHEW BERNSTEIN: Yeah, certainly. So there's not a lot of companies out there left the same size as Endeavor in terms of the amount of future locations that Diamondback's acquiring in that deal. So, really, you're creating a company, this new Diamondback Endeavor-merged firm, that is right up there in that top upper echelon of inventory holders in the basin.

So moving forward, you're going to see more and more of that region consolidated by just a few names. And it's also going to change the nature of the types of deals that we see in the Permian. As I said, there's not a lot of large private targets out there left. There are a few, but what we expect to see in the next phase is potentially some more public to public mergers of equals in order to build scale that way.

RACHELLE AKUFFO: And which are some of the oil companies that you think could be next, ripe for this M&A activity?

MATTHEW BERNSTEIN: Yeah. So several operators have, effectively, grown very quickly and organically in early-2023 prior to the Exxon Pioneer deal. So that includes some names like Civitas Resources, Vital Energy, Ovintiv, Permian Resources. And these operators were able to acquire private operators that were kind of bundled up by large private equity groups and then who were looking to exit that investment.

So I think as a lot of these companies that I mentioned look to gain scale in organically in the Permian during 2023, I think that some of those names could be ripe either to be acquired by a larger company that, perhaps, has stayed out of the dealmaking so far, or, potentially, merge together and create a formidably-sized company in that regard.

RACHELLE AKUFFO: And what do you think could be some of the headwinds that we could see when it comes to the energy M&A space here? Because, obviously, we've seen a lot of criticism here for some of these big mergers-- not so much seeing that, though, in the energy space.

MATTHEW BERNSTEIN: Yeah. If you look at it, obviously, the Permian Basin is the most productive and, really, the most economic region within the US onshore oil fields. That said, there are still many other areas of very economic oil production. You have the DJ basin in Colorado, the Bakken shale in North Dakota, the Eagleford shale in East Texas.

So while a lot of the activity for economic reasons is centered in the Permian Basin, these deals aren't necessarily, I'd say, consolidating a tremendous share of the entire US oil output in the hands of a few operators.

RACHELLE AKUFFO: Certainly important context to add there. Appreciate you taking the time to join us this morning-- Matthew Bernstein, Rystad Energy Senior Analyst.