On the heels of Occidental Petroleum’s agreement to buy oil and gas producer CrownRock, industry watchers anticipate more consolidation is coming.
“What it says is that there are assets out there that you can buy more attractively than your own company stock,” Cole Smead, CEO of Smead Capital Management told Yahoo Finance after the $12 billion deal was announced.
The takeover of Midland, Texas-based CrownRock differs from other recent mega-deals in that it’s financed with debt, and it involves a privately held company.
“There’s not a ton of deals like this from a private to public, but there’s a lot of public-to-public,” Smead said. “We’re probably going to end the 2020’s with 10 oil companies in America.”
In October Chevron (CVX) announced it would acquire Hess (HES) for $53 billion and Exxon Mobil’s (XOM) agreedto acquire Pioneer Natural Resources for $60 billion.
All three major deals involve energy players with footprints in the Permian Basin. The area, known for technologically advanced production at lower costs, has become a hotspot for takeovers as the oil majors gobble up assets in search of more output.
“We expect the trend to continue in 2024 and that consolidation will put more assets into the market as portfolios are optimized creating growth opportunities for companies across the size spectrum,” said Jeff Robertson, managing director with Water Tower Research, in a note to investors.
“Companies with strong balance sheets could capitalize on acquisition opportunities to high-grade their asset bases,” Robertson added.
The energy sector is on pace to end the year as the second largest under-performers, behind Utilities.
The S&P 500’s (^GSPC) Energy Select ETF (XLE) is down roughly 7% year-to-date, compared to overall benchmark’s 21% gain.
The decline is a stark difference to last year’s performance, when oil and gas related stocks rose to all-time highs amid record profits and soaring crude prices.
Among the large companies that announced mergers this year, Chevron is down roughly 20%, while ExxonMobil is 10% lower.
Occidental Petroleum, the top gainer in the S&P 500 last year, is down about 10% since the start of 2023.
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Ines is a senior business reporter for Yahoo Finance. Follow her on Twitter at @ines_ferre
