Friday April 12th, 2019 started off as just another quiet morning in H-Town, but that calm was shattered by some big news in the world of business coming from the oil and gas industry: The Houston Chronicle reported that Chevron tendered a bid worth $33 billion to buy The Woodlands-based Anadarko Petroleum. The news of Chevron’s offer rocketed around the world of finance, making front-page news everywhere, and leading to much speculation of what this is going to mean for the future of the oil and gas business.
On splits and mergers in the oil and gas industry
The history of the oil and gas industry, though barely 150 years old, is a rich and fascinating one. The industry has attracted many colorful characters, filled with dreams and ambitions. Perhaps the best account of what the oil and gas industry has meant for the world is Daniel Yergin’s The Prize, which (although published in 1990) remains a classic, definitive work. Yergin tells the tale of the rise of Standard Oil, and of the vast wealth and power that Standard Oil brought its founder, John D. Rockefeller. Standard Oil was famously (or perhaps infamously) brought down in the US Supreme Court case of Standard Oil vs. the United States, which was decided in 1911. The Supreme Court ruled that the firm was an illegal monopoly under the Sherman Anti-Trust Act, and the company was then broken up into nearly three dozen smaller companies.
Neither time, nor business, stands still forever. I can recall being told the tale over and over when I was a younger man of the Seven Sisters, and how the evil offshoots of Standard Oil still ruled the universe. However, the tale of the evil Seven Sisters proved to be outdated even when I was being told the story when I was a young man. The countries that formed OPEC seized control via nationalizing their oil and gas industries in the 1960s and 1970s, and much of the power of the Seven Sisters disappeared along with it.
And yet, the story of mergers and acquisitions still wasn’t over, not by a long shot. Many mergers between the smaller players in the industry occurred over the years, but the big headline-grabbing mergers of more recent history occurred in the mid-to-late 1990s. The big news in the 1990s for the oil and gas industry that remained in private hands was that the major fields that were worth going after were either deepwater offshore, or were in politically risky places like the former Soviet Union, Algeria, or Brazil. Ergo, a theory developed in the minds of industry leaders in the 1990s that the oil and gas companies of the future were going to have to get really big again in order to have deep enough pockets to handle huge, expensive offshore projects. They would also have to be big enough to handle the political risks that come with doing business in countries not as politically stable as those in the West. Hence, mergers like Exxon and Mobil, BP and Amoco, and Texaco and Chevron occurred, leaving these three companies, along with Shell as the big four of the private companies of today’s oil and gas business.
And then came fracking
This overall state of affairs in the oil and gas industry remained for roughly 15 years, until the discovery of successful fracking techniques at the end of the first decade of the 21st century. The industry had been experimenting with hydraulic fracturing as a method of drawing up oil and gas for decades. Yet, it wasn’t until the period around 2008-2010 or so that the combination of high oil prices and a perfection of the techniques finally combined to cause what amounted to nothing less than a revolution in the fortunes of the American oil and gas industry. To understand the magnitude of the reversal of the American oil and gas industry’s fortunes that were made by fracking, one need to only look at this historical production chart. In the period between 2005 – 2010, the American oil and gas industry was producing only 5 million or so barrels of crude oil per day. That figure in 2019 is now 12 million barrels, amounting to an increase of the entire output of two or three OPEC countries.
Initially, the fracking boom in Texas centered around the Eagle Ford shale formation in south Texas. However, over the past 2-3 years, far greater money and effort have shifted to the Permian basin in West Texas and Eastern New Mexico. Oil is now pouring out of the Permian, lifting Texas crude oil production to some 4.7 million barrels per day, its highest levels ever. Yet one could argue that it was precisely this success that led to the Chevron / Anadarko deal. It was the small time hustlers which made fracking work ten years ago, not the big boys. However, now that the big players in the industry have caught up with making fracking work, it is the Exxons, the Chevrons, BPs, and Shells of the industry that are using their muscle and power to take command of large swathes of the Permian Basin, driving up prices for acreage and making life difficult for the smaller and mid-tier companies in the business. And the big players desperately need to do this. That is because one of the big headaches of running a giant oil and gas company is that you have to show investors that you have enough future proven and probable reserves to produce in the future in order to convince investors that your company can sustain output, and hopefully profits. In a world where much of the oil and gas resources are under the control of national governments in often corrupt, unstable, and unfriendly parts of the world, the vast potential of the Permian and other shale formations, located here in America, and which can now be unlocked at an economically competitive price, is nothing short of a Godsend. Hence, what we are witnessing is a furious competition for control of the Permian Basin.
But is the Chevron / Anadarko deal a done deal?
Well, Chevron’s bid for Anadarko has been tendered. The boards of both companies have apparently approved of the deal. However, the Houston Chronicle story did mention that Exxon, Shell, or perhaps the French company Total could all still try to make a better bid for Anadarko.
And is this merger the start of a new wave of mergers for the oil and gas industry?
One has to say that Chevron’s bid for Anadarko raises the possibility that there will be a new realignment within the American oil and gas industry. It was interesting to note the reaction of Wall Street to the Chevron bid for Anadarko, and how it affected energy stocks. Anadarko’s own stock went up $14.98 a share (32 percent) on the news. The stocks of nearly all of the mid-tier companies in the oil and gas industry – Marathon (up 3.32 percent), Murphy Oil (up 2.9 percent), EOG (up 6.7 percent), Noble Energy (up 6.92 percent), Devon Energy (up 7.38 percent), Pioneer (up 11.53 percent), and Hess (up 4.44 percent) all benefited from news of the deal in Friday’s trading. In contrast, Occidental Petroleum’s stock took a 3 percent hit, as Oxy management had bid $70 per share for Anadarko, but lost to Chevron’s bid partly because of a break-up fee and a requirement of a shareholder vote.
In contrast to the optimism shown towards the mid-tier energy companies, the stocks of the big guns were more muted. Exxon’s stock was down 1.2 percent on Friday. BP’s was down 0.45 percent, and indeed Chevron’s own stock took a big hit. Chevron was down just under 5 percent for the day. One might conclude from this that Wall Street thinks that the big companies are all but admitting that they have no better use for their cash other than to buy out smaller rivals, and that’s a rather dim prospect to ponder if you are an executive working for one of the major oil companies. Furthermore, merging companies is not an easy thing to do. Not only are there potential clashes in workflows and work culture, but there are also matters of strategy – of figuring out whether/how another company’s portfolio of assets will complement your company’s assets.
Sadly, for the more ordinary everyday folks who work in the oil and gas industry, there has to be the prospect of layoffs. The people who went on record for the Houston Chronicle stories on the Chevron / Anadarko deal stressed to say that there would not likely be layoffs. However, realistically there has to be some prospect of redundancies in operations whenever two companies merge, hence the prospect that some employees will lose their jobs. I can sympathize because I’ve been there. I personally have been through several industry downturns, and lost my job in the 2014-2016 downturn.
And yet, one might say that a new wave of mergers in the American oil and gas industry would leave the industry in better shape than it ever has been before. In the far distant future, historians of future centuries will inevitably come to the conclusion that America got more out of its oil and gas industry by leaving the industry in private sector hands than any other country in the world, and the Chevron / Anadarko story will likely be the start of yet another chapter of the amazing story of the oil and gas industry.