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Is the U.S. Oil Production Boom Fading? M&A Activity Suggests So

The US oil boom might cool off because of a lot of company mergers.

Big companies are buying smaller ones that helped US oil do really well in 2023.

Companies want to spend less, drill less, and give more money back to their owners.

The US oil industry made big headlines in 2023 thanks to its surprising record oil production. However, experts believe 2024 won't see the same level of growth, mainly due to one key factor: a surge in mergers and acquisitions (M&A).

So far in 2024, the oil and gas exploration sector has seen mergers worth $55 billion. This follows a record-breaking year in 2023 when the industry announced deals totaling $190 billion, the highest ever for this sector.

This wave of mergers is changing the landscape for US oil production.

Private companies played a big role in last year's oil increase. Firms like Endeavor Energy Resources and CrownRock were among the top private producers, contributing significantly to the growth in the Permian Basin's oil output. On average, the five largest private oil exploration and production companies were behind a third of the annual crude production increase in the Permian since 2019, says Rapidan Energy.

But things started to change with some major deals. ExxonMobil made headlines last year by purchasing Pioneer, securing a vast amount of oil resources in the Permian Basin. Following that, Chevron announced its acquisition of Hess. And now, in 2024, Diamondback is in the process of buying Endeavor, while Occidental plans to take over CrownRock.

Big public companies buying smaller private ones might slow US oil production growth.

Rapidan, a group of experts, says the big increase in oil production last year came from three main things: more oil from small companies, better drilling techniques, and using wells that were ready but not used yet. They don't think this will happen again this year, predicting growth will slow down from an extra 1 million barrels a day last year to just 300,000 more barrels a day in 2024.

A big deal where Diamondback is buying Endeavor shows how big chunks of oil land in the Permian Basin, a key area for oil, are moving to big companies. Morningstar, a research firm, notes that Diamondback and ExxonMobil now own about half of this important area.

Big and small oil companies have different goals. Larger ones want to spend less, do less drilling, and give more money back to their owners. Small ones used to focus more on making more oil because they didn't have to answer to as many owners.

Because of this, fewer oil rigs will be used. Stephen Ellis from Morningstar explained that big companies will stop using rigs that drill wells making less money. These wells could work for a small company but not for a big one looking to make the most money possible.

This idea, known as "capital discipline," means big companies are more interested in making sure their investments pay off well, rather than just making as much oil as possible.

Let's look at Endeavor, an oil company that since 2019 has been adding between 100,000 to 200,000 barrels of oil a day to the overall oil supply.

"Diamondback, which sticks to a careful spending plan and has promised to focus on this approach, keeping its oil production growth modest while giving money back to its shareholders, will now include that extra 200,000 barrels a day from Endeavor under this careful spending approach," said Hunter Kornfeind, an oil analyst at Rapidan Energy.

In a note, Diamondback said it's planning to keep its oil production at the end of 2023 the same as before but with less spending, showing its dedication to spending wisely and preferring quality over quantity.

Unlike private companies, public companies have to consider paying dividends and their stock value. So, while a private company might increase its oil production when prices are high, public companies can't do this as freely.

Kornfeind explained, "These independent private producers that have been boosting their production because the price of oil (WTI crude oil) was between $80 to $120 in the last few years won't be able to continue doing so."

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