Too big to merge? Big Oil avoids acquisitions

With the U.S. pumping record amounts of oil, one might assume that the largest oil companies would be basking in the glow—and perhaps working out a deal or two to capitalize on the domestic boom.

But they’re not.

The urge may be there to snap up smaller and more nimble oil producers, but analysts say the domestic Big Three (ExxonMobil, Chevron and ConocoPhillips) are encumbered by sprawling size and underperforming assets that make acquisitions less likely.

Even as other industries undertake a flurry of mergers amid low interest rates and a bull market, major oil companies appear gun shy on large purchases.

“They have to reinvent themselves—these companies are too big to grow,” said Fadel Gheit, managing director of oil and gas research at Oppenheimer & Co. He compared the Big Three to “an aging Yankees team” that has a long history and expensive talent but that routinely underperforms.

In 2010, Exxon acquired XTO for $41 billion—a deal Gheit branded “an absolute disaster” because it failed to boost domestic production at the world’s largest oil company.

“A company like Exxon would have to buy a company every year in order to keep the oil flowing,” Gheit said. Because so much of the Big Three’s production is focused on more prolific offshore wells, a deal on a smaller shale outfit wouldn’t “move the needle,” he said.

Exxon’s sea-based assets “would be the equivalent production of 5,000 wells onshore. Each … deep-water well is producing 10,000 to 15,000 barrels per day, while the other guys are producing hundreds of barrels,” the analyst said. “There’s no comparison.”

A spokesman for Chevron told CNBC that the company does not comment on merger and acquisition strateg but “is always looking for opportunities that make sense for shareholders.”

A representative for ConocoPhillips—which by most measures is outperforming competitors—said it is “doing quite well” with its current strategy.

Exxon did not immediately respond to an inquiry for comment.

According to Stewart Glickman, group head of energy and materials equity research at S&P Capital IQ, the rising price of crude has hamstrung the ability of Big Oil to increase its refining margins, a traditional source of profits. The abundance of natural gas makes it hard to profit from that sector, making a deal less attractive.

“Folks that have gas operations are focusing on their gas plays and trying to wait it out,” Glickman said. “There’s some pressure on the upstream names because the natgas portion of their portfolio isn’t delivering yet.”

Deutsche Bank oil and refining analyst Paul Sankey said Big Oil was “caught flat-footed” by the breakneck speed at which domestic production unfolded.

“Big Oil is more cautious and circumspect, and there’s no question they were late to the game,” he said. Now, “they’re in a jam. They need to do something.”

The shale boom prompted a flurry of M&A activity among regional players in the second quarter, according to a recent study from PriceWaterhouseCoopers. Fifteen of those deals had values of over $50 million. With oil comfortably perched above $100 and U.S. shale production soaring, a Big Oil bid for a good company may come with a hefty price tag.

The question now is if you would “do a deal where you’d pay very high for the right [company],” Sankey said.

7 Comments on "Too big to merge? Big Oil avoids acquisitions"

actioncjackson on Sun, 18th Aug 2013 7:05 pm 



The message I’m getting is that big oil doesn’t think it’s worth investing onshore. That is a bad omen in my opinion. It doesn’t speak much for shale plays and implicitly suggests that big oil expects to be the dominate fuel source until the collapse.

GregT on Sun, 18th Aug 2013 7:06 pm 



Just wait and see what happens to Big Oil, once the Too Big To Fail Banks stop pumping the markets with QE ‘money’.

DC on Sun, 18th Aug 2013 7:21 pm 



Big Oil only exists because of big subsidies, generously provided by the endless money creation in the US. With more nations asserting control over there own oil, its getting harder all the time for the Oil cartel to call on there murderers for hire(the US military) to ‘take out’ all those stubborn foreigners that keep insisting on controlling there own oil. IoW, the oil cartels mercenaries are stretched thin. Being ‘larger’ wont change that-so the option is not really pursued.

rollin on Sun, 18th Aug 2013 8:13 pm 



Companies like Exxon Mobil don’t just produce oil, they have a diversified portfolio of products and services to rely on. For them, continuous oil probably looks like a not very profitable flash in the pan. They probably consider wells that fall off 90% in a few years as a poor investment.
One also needs to consider the likely growth in price that will come with time, thus increasing income without increasing output. So from a business perspective, investing in larger long term reserves is probably the way to go.

bobinget on Sun, 18th Aug 2013 9:19 pm 



I believe Conoco did in fact increase production organically. Exxon fell short on some bad Russian deals. Big Oil seeking oil everyplace but safe North America is a sure sign volume is not there for ‘BO”.

Fields take years before they ‘go into production’.
Public Corporations need report every damn there months. Don’t worry about Exxon. AS far as the oil bidness is concerned they are not only the bell weather
for peak oil, they ARE peak oil.

BillT on Mon, 19th Aug 2013 12:45 am 



They know that shale oil is just a bubble about to burst. There are no real oil fields left to buy.

Oilduck on Mon, 19th Aug 2013 11:23 am 



When Uncle Sam Bernanke keeps his bugs throwing helicopter on the ground US next energy decline will set in. Lucky are those non anglosax who follow better ways of living.