Consolidating the Energy Industry: Mergers and Acquisitions in the Era of Big Oil’s Decline

Big Oil is shrinking as its options contract, with major players in the industry opting for mergers and acquisitions over costly drilling operations. The recent takeover frenzy in the oil and gas sector is not a sign of expansion, but rather a defensive move in response to a long-term decline in demand.

The pandemic served as a wake-up call for oil companies, forcing them to cut costs, write down asset values, and focus on efficiency. In the US shale business, companies in the highly productive Permian Basin have been able to increase oil production with fewer rigs, thanks to productivity gains and cost controls.

ConocoPhillips recently agreed to buy Marathon Oil in a $22.5 billion all-stock deal, while Chevron’s takeover of Hess Corporation for $53 billion in shares is facing legal challenges over preemptive rights in the lucrative offshore Guyana oil field.

Other major deals in the industry include ExxonMobil’s $60 billion purchase of Pioneer, Occidental’s acquisition of CrownRock, and Diamondback Energy’s takeover of Endeavor Energy Partners.

These acquisitions are not about expansion, but rather about replacing depleted reserves and controlling costs. With high oil prices and inflation, buying existing assets is often more cost-effective than drilling new wells.

The ongoing legal battle over the ownership of the offshore Guyana oil field highlights the importance of securing valuable reserves for future production. Companies like Chevron and Exxon are vying for control of these assets to ensure long-term profitability and shareholder returns.

As the oil industry continues to evolve, mergers and acquisitions will play a crucial role in shaping the future of Big Oil. Investors like Warren Buffett are closely watching these developments, looking for companies that can generate cash flow and return capital to shareholders through buybacks and dividends.