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KIT NORTON

Buffett And Exxon Mobil Deals Raise Oil Consolidation Stakes. What Does 2024 Hold For The Permian Basin?

Energy industry consolidation ramped up at the tail-end of 2023, lending a rising sense of urgency to ownership of U.S. shale oil supplies. Exxon Mobil and Warren Buffett-backed Chevron and Occidental Petroleum all made hefty acquisitions to shore up production, primarily in the U.S. All eyes are now trained on the resource-rich Permian Basin, with more mergers and acquisitions expected in 2024.

Across the gas and oil industry, 2023 has been a big year for mergers and acquisitions. Analysts say the industry has struck more than $250 billion worth of deals. That's the highest annual year-to-date total since 2014.

The action began in earnest with Exxon Mobil firming up its Permian Basin status with a $60 billion deal for Pioneer Natural Resources in October. Chevron quickly followed with its $53 billion purchase of Hess, expanding its ownership in offshore Guyana and in the northern U.S. Bakken shale play.

These two deals set off a chain reaction with smaller energy companies looking to increase their share of the consolidating Permian Basin pie. Warren Buffett-backed Occidental Petroleum made its move recently, agreeing to purchase CrownRock, one of the largest privately held producers in the Permian. The deal, valued at around $12 billion, would be Occidental's first major acquisition since 2019.

Warren Buffett holds a nearly 6% stake in Chevron and 25.9% of OXY.

What Do The Exxon Mobil And Chevron Deals Say About The Oil Industry's Future?

Following OXY's acquisition of CrownRock, Andrew Dittmar, of Enverus Intelligence Research, wrote the sale could be the "first leg of a triple crown of mega sales by private companies in the Permian."

Permian Basin: A M&A Hot Spot

As of August, OXY was the N0. 3 producer in the Permian Basin, according to Enverus data. The top 10 producers include PXD, EOG, ConocoPhillips, Exxon Mobil, Diamondback Energy, Devon Energy and Chevron, along with private Mewbourne Oil and Endeavor Energy Resource.

Third Bridge analyst Peter McNally told IBD in an interview that Permian Basin producers make attractive acquisition targets because there is less federal government regulation in that area, there is easy access to downstream and export markets, and to the resources themselves in the basin.

But the resource has limits. At current drilling rates, Enverus estimates that U.S. shale reservoirs hold about six years of high quality inventory, capable of generating a 10% return at a $45 oil price. More than 70% of that inventory is in the Permian Basin.

"With no new shale plays on the horizon and global opportunities shrinking, the Permian also leads in potential for finding new resource as drillers test additional benches of the region's stacked pay," Dittmar wrote.

That means drillers could find additional, high-profit oil reserves as they drill more extensively into the Texas bedrock. But in general, there is a sense that the window is closing for companies wanting a piece of the industry's early century, shale boom oil margins.

"The driving force behind rising (company) valuations is an urgency by large companies to secure the remaining high-quality U.S. shale inventory," Dittmar wrote.

Permian Basin: Potential Suitors And Targets In 2024

Analysts are projecting that mergers and acquisitions in the oil and gas industry will continue at a steady clip over coming years.

"If you are going to grow in the U.S., it makes sense to try to either expand or find a foothold in the Permian," CFRA analyst Stewart Glickman recently told IBD.

"I think the wave of consolidation continues," he said.

Glickman said ConocoPhillips and Devon Energy are companies that could be looking into Permian deals.

However, Glickman added he sees DVN as more of a target than an acquirer. Meanwhile, Dittmar also sees Endeavor Energy and Mewbourne Oil as "potentially up for grabs" as private companies see escalating value of their undrilled Permian Basin acreage. ConocoPhillips and EOG could also look to make purchases, according to Dittmar.

Glickman emphasized that U.S. energy companies are currently just as focused on return to investors, via dividends and buybacks, as they are on production growth.

"I don't expect the U.S. oil community to deviate from this path because they've been rewarded for it, for the most part, in the last couple of years," Glickman said.

2024 Oil Prices: Threat of Escalating Geopolitical Tensions

It has been a tumultuous few years for oil prices, as geopolitical jockeying and a pandemic have roiled the market. In 2023, oil markets turned lower after the price spikes of 2022, driven by Russia's attack on Ukraine. And while the surge of hostilities in Gaza and Israel rattled the geopolitical world, it boosted oil prices for only a month.

However, there are still concerns. If the Israel-Hamas conflict escalates and draws direct conflict with Iran, it could force the U.S. to more strictly enforce sanctions on Iran and its 3 million barrels per day of oil.

And on Monday, oil prices increased more than 2% after recent attacks by Iran-backed Houthi militants on vessels traveling the Red Sea led BP to began bypassing the trade route. The Houthi rebels have declared support for Hamas in the aftermath of the Oct. 7 terrorist attack on Israel and the ensuing war. The Houthis have begun targeting ships traveling to Israel.

Is Chevron A Buy Or After Increasing Its 2024 Spending Plans?

The Red Sea allows oil originating in the Persian Gulf access to the Mediterranean and Atlantic sea lanes, via the Suez Canal.

Permian Basin: Oil Price Uncertainty

U.S. oil prices have recently hovered near their lowest point of the year, down about 25% from a September high and just below where they started the year. On Tuesday, West Texas Intermediate oil futures traded down slightly, and just above $72 a barrel.

Goldman Sachs on Monday forecast Brent crude prices between $70-$90 per barrel in 2024, cutting its expectation by $10 per barrel. The price of Brent crude, widely used as the global benchmark and which originates in Europe's North Sea fields, typically runs several dollars higher per barrel than WTI.

"While we have adjusted the range, we still look for rangebound prices and only moderate price volatility in 2024," the firm wrote. "Elevated spare capacity to handle tightening shocks should limit upside price moves."

What's Instore For Exxon Mobil And Chevron In 2024?

Meanwhile, McNally said he expects an uncertain year, with Brent crude trading in the range of $70-$95 per barrel in 2024.

That status of China's economy, and its considerable demand for oil, also remains a large question mark for analysts heading into 2024.

Glickman sees current oil prices lower than they should be considering the current political picture, including China's economic outlook and the Organization of Petroleum Exporting Countries (OPEC) latest production quota action. Those factors should lift oil prices to a 2024 average somewhere closer to $90 per barrel, Glickman says.

"I am still reasonably bullish on crude," Glickman said. "Not necessarily a great year, but a good year."

Please follow Kit Norton on X, formerly known as Twitter, @KitNorton for more coverage.

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