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Oil: Why M&A consolidation is emerging as a trend

Mega-merger moves are shaking up the oil sector. Hess (HES) shareholders have given the green light to the company's whopping $53 billion acquisition by Chevron (CVX). Meanwhile, ConocoPhillips (COP) is gearing up to acquire Marathon Oil (MRO) in a massive $17.1 billion all-stock transaction. Joining Market Domination to discuss the outlook for the oil sector amid this consolidation wave are Alpine Saxon Woods Founding Partner Sarah Hunt and CFRA Research Energy Equity Analyst Stewart Glickman.

Hunt highlights the entire industry "is under a lot of pressure" as it pivots toward alternative energy sources. "I think this is all about consolidating into a smaller number of players, in a very mature industry, that is looked at as something that is not going to last forever," Hunt tells Yahoo Finance.

Glickman, however, doesn't see the Conoco deal as "transformative," suggesting the company is on the defensive. With the Permian Basin posing headwinds for oil output, Glickman argues that by acquiring Marathon, Conoco is decreasing its Permian exposure — ultimately benefiting the company. He adds, "If you're going to grow at all, you're better off growing by acquisition than you are by throwing a lot of money into new cap-ex."

For more expert insight and the latest market action, click here to watch this full episode of Market Domination.

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This post was written by Angel Smith

Video transcript

Oil and gas consolidation continues today.

Kind of Phillips announcing a deal to buy marathon oil.

That news coming after has shareholders voted to approve the $53 billion merger with Chevron amid the ongoing deal making in the sector.

We're looking at how to navigate the big picture with the Yahoo Finance playbook.

Joining us now, Sarah Hunt, founding partner and Chief Market strategist at Alpine Sa and Woods and ST Click CFR, a research energy equity analyst and deputy research director guys.

It's great to see you again.

Here we are talking about another big deal in the industry.

So let's start there with Conoco Phillips and Marathon.

Um, and you know, whenever I see another one of these big moves, I guess my first question is, is this defensive or offensive at this point, Sarah, I'll, I'll start with you and are, are you a buyer of, of this deal and of either of the parties?

So I'm gonna answer yes, because it is both offensive and defensive.

I think that there is a feeling right now in the larger oil companies that it's better to consolidate the service side is consolidated as well.

And the whole industry has been under a lot of pressure as everyone has talked about a shift into alternative energy.

And I think the reality on the ground is we're gonna be with fossil fuels are gonna be with us for a lot longer.

But there's been a change in both the way investors perceive them.

Certainly on the banking side, you used to be able to borrow money whenever you wanted to, to drill and now there's much more of a capital discipline.

I think this is all about consolidating into a smaller number of players in a very mature industry that is looked at as something that is not going to last forever.

Stuart.

Let's bring you in here as we'll get your take on this deal.

Does it make sense to you, Stuart?

Uh you know, financially strategically.

Do you see it as perhaps transformative for Cono Stewart?

Uh Yeah.

Hi, Josh, thanks for having me.

So I, I don't think this is transformative for Conic O. I do think it's largely playing defense.

Um This is a company that has really large exposure to the Permian Basin by virtue of its 2021 acquisition of concho resources.

And I think there is a concern in the industry that perhaps the ability to get more barrels out of the ground.

And the Permian is gonna outstrip the ability to take those out of the region by pipeline and that creates basis risk.

So I think by growing by, by acquiring marathon, you're getting more eagle fert exposure, you're getting more bakken exposure and therefore reducing your permian exposure.

But um I do agree with the sentiment that, you know, this is not an industry that is, you know, certainly high growth.

It's a mature industry, it's, it was overripe for consolidation and I think the capital discipline is definitely there.

So if you're gonna grow it all, you're better off growing by acquisition than you are by throwing a lot of money into New Cap X A drill bit.

Well, guys, uh one of the areas where we are seeing growth is production of oil and gas in Guyana.

Uh one of the the areas that is very much at the center of this Chevron Hess acquisition, they got the approval of the HES shareholders, but that's just the first step, right?

Because there is still this uh sort of disputed part of the transaction uh from Exxon, uh Stuart, I'll start with you on this one.

How do you think this is gonna go?

Yeah.

So the problem is that the, the joint operating agreement has not yet been made public.

So it's hard to know whose lawyers are right?

Is it Chevron's lawyers or Exxon's lawyers?

Exxon claims it has right of first refusal over this project and it is Guyana's clearly the crown jewel uh in hes and absent the absent the exposure to Guyana.

I don't know that Chevron's particularly interested in the rest of hes.

Um It's the one exception I would say, um, you know, compared to the lower 48 which is really mature and consolidating Guyana as a stand alone project is gonna throw out a ton of incremental oil probably through the end of this decade, but it's too early to say who's gonna be right.

Uh And wins out in, in the, in the court of arbitration.

And Sarah, I wanna go back to you just a, another question for, you know, all this consolidation we've seen, you know, do you think we've sort of reached a high or does it continue?

And if it does continue, you know, what companies do you think would be potentially attractive acquisition targets that are left, you know, you'll, you'll hear names Devin, for example.

Well, I think that first we have to see how some of this plays out because you've already got some antitrust interest in this area and in some of the mergers that have already been put forward.

So we have to see how that goes.

I think that any, any of the smaller companies, any of the smaller E MP S just look at the market gaps and that will tell you who is more likely to potentially be acquired.

I think that Devin's been talked about as both mostly as an, a choir or, and not as an acquiree, but that's also hard to gauge because anything can change as we've seen with this in this industry um after some period of time and certainly depending on what's going on with the rest of the industry and the rest of the players because nobody wants to end up being too small to compete with some of the very big guys.

So I think you will see some of this continue and Sarah just to put a fine point on what you were saying, if we can put back up that screen, that lists the deals because most of them are indeed still pending.

With the exception of Exxon pioneer, does the fact that that one as the largest on this list.

Got the go ahead, Sarah.

Do you think that the rest are likely to also get?

Well, Chevron has, has its own issues but will they get um uh antitrust clearance?

Well, this is a question and this is also a question even for the marathon and cono deal because of uh of some of the contiguous acreage.

But I think in the end, the fact that Exxon got that through was a positive, but you could also say the other side, which is because that one got done, they don't want any more consolidation.

So then you've got problems with some of the other ones.

I think we're going to have to see how that plays out.

And I think, you know, and again, it's in mature industry, the argument that these guys merging is gonna change gas prices.

At the pump.

There's, it's a much more complicated situation than that.

So that doesn't really hold water with the people who know the industry very well.

But I think that you've just got some, you know, some digestive stuff to go through here as these companies try to put themselves together.

And finally Stuart, uh let's get your take on Exxon, you know, wrapping up that annual shareholder meeting today, Stewart voters signing with the oil giant against, you know, this ongoing feud with activist investors.

What was your take there?

Yeah, so uh Exxon's directors got reapproved, uh not quite as high as they have been priors, but still over 90% for the most part, uh the shareholder resolutions that were put forth were all rejected.

I I think what this suggests is that institutional shareholders by and large, even if they dislike Exxon's kind of combative approach to dealing with um shareholder proposals are still happy with the financial results and 2023 would place, you know, high, not quite as high as 2022 but certainly by any historical comparison, a very strong year for Exxon.

And I think that ultimately won the day.

Well, and Sarah just quickly on this, I mean, I think you guys are Exxon shareholders, how do you feel about their tactics and the fact that they have indeed been sort of pushing back against some of these attempts at shareholder activism, particularly from various climate groups and investors.

Well, on the Exxon front, we're actually shareholders of Comic Con.

We've been shareholders of Chevron as well.

But I think that this is, I can see both sides of this and they'll argue both sides.

Right.

They'll say there's way too many frivolous lawsuits or there's way too many frivolous actions and that costs us money and we have to not do what we're supposed to be doing.

And the other side is there's no way to let us in.

So we can tell you as shareholders, what we think it should be a priority for you.

So that I think that there are, you know, there's been abuses probably on both sides.

I think going after them at this stage.

Also, you're going after them from a series from a space of strength and saying, you know what?

We've had a great couple of years and we're not going to allow you to come in here and add these costs and all this other litigation to our shareholder proxy votes.

Uh How that ultimately resolves itself.

I'm not sure.

But some of these are people with very few shares that go in and try to make a lot of noise.

In some cases.

If you get an overwhelming response, you're going to see them pay attention.

If you get enough shareholders say we want to look at all these things that some of these shareholder original proxy questions were about Sarah Stewart.

Great to see you again.

Thanks so much.