Yahoo Finance The real reason why oil companies are gobbling each other up
This week reflects a push by exploration and production companies to scoop up assets. On Tuesday, EOG Resources (EOG), the largest oil producer in the continental United States, announced it would buy Yates Petroleum Corp, with acreage in the Permian Basin in Texas, for $2.5 billion.
Meanwhile, Apache Corp (APA) on Wednesday announced it made the discovery of a significant new resource play. Over the last year, it had purchased 350,000 acres of drilling rights in the Permian Basin—an investment that seems to now be paying off as the stock has risen 14% in the two days following the announcement.
Over the summer, Pioneer Natural Resources (PXD) also picked up acreage in the Permian, as did Concho Resources (CXO), which announced a $1.6 billion deal last month.
Oil prices have recovered from their January lows, marking a rebound for the energy sector (XLE), but deal activity throughout the year has remained tepid until recently.
Oppenheimer analyst Fadel Gheit said said investors should be wary of too much celebration as the acquisition rush “isn’t necessarily a sign of a gangbusters underlying market.”
“Now everyone wants to be in the same zip code,” Gheit said. “Everyone is focused on having bragging rights on whatever the trend is. Before everyone wanted to be in the Haynesville, then the Marcellus, then the Eagle Ford. Now it’s the Permian Basin.”
Gheit added that we have seen a notable improvement in oil prices, which will continue, but we are not going to see a surge in oil prices, which some stocks are pricing in.
“US oil production will continue to decline, demand will continue to grow modestly and the inventory overhang will decline,” he said. “This will help oil prices rise slowly, reaching $60 in 2018.”
He added that producers are looking to shift acreage and production away from areas that haven’t been economical in lower environments and exploration—including making use of new fracking technology—is an important component of that strategy.
He added that the likes of ExxonMobil (XOM), Chevron (CVX), and Occidental Petroleum (OXY) are all on the lookout for smart deals, with still more appetite on tap for EOG, Apache, Pioneer and Concho.
Meanwhile, in the IPO space, the absent energy sector is showing sprouts of life, albeit small.
Noble Energy (NBL) plans to unlock value from its Colorado pipelines, a yield-oriented play. This would mark the first energy IPO in over a year, following a rough patch for the energy space, including the oil and gas business of Freeport-McMoRan (FCX) withdrawing its IPO in May amid low oil prices.
Deal excitement comes as oil has risen 7% for the week, helped by a record drawdown in US crude supplies and as Russia and Saudi Arabia vowed to cooperate to stabilize oil markets, though fell short of agreeing to a freeze.
The bottom line: Major exploration and production companies continue to look for opportunities to optimize their assets—the Permian Basin in Texas being the latest focus—but too-dramatic expectations for a pop in oil prices is overdone, especially as the recent spate of deals reflects the desire of companies to be in the “right” area of the moment and improve their acreage potential.
