Why Big Oil Won’t Be Getting Bigger Soon


Why Big Oil Won’t Be Getting Bigger Soon

One reason oil companies have been struggling for years since well before the pandemic hit is that the industry is fragmented, with too many inefficient operators pushing supply into the market. One solution is for larger more-efficient operators to buy up competitors, consolidating the industry. That way they can lower the overall cost of production and convince investors and lenders that the companies are worth an investment. And given that most oil-and-gas companies are down 30% or more this year, acquisitions can presumably be completed at a bargain. For Big Oil, this could be a chance to get bigger, on the cheap. Don’t bet on it, at least not in the near term. There are few signs so far that mergers are on the horizon. Investors are rewarding cautious oil-and-gas companies that are using their cash to sustain their balance sheet or make sure they can keep paying dividends. Mergers and acquisitions would divert that cash to other purposes. Cowen analysts said in a report on Thursday that the next age of consolidation—aside from a few isolated incidents—will likely have to wait. he Cowen team, led by Jason Gabelman, wrote that the acquisitions completed since the last downturn in 2014-16 have mostly turned out badly and likely made energy executives gun-shy about rolling the dice again.

“One could argue M&A is part of the reason Royal Dutch Shell [ticker: RDS.A] cut its dividend, and BP [BP] faces peer-high gearing [a metric that tracks debt to equity]. Occidental stock [OXY] has suffered since its Anadarko acquisition,” Gabelman wrote. And supermajors have said in recent months that acquisitions aren’t at the top of their priority list—in fact, almost all of them talk about keeping their dividends as priority No. 1. That doesn’t mean there will be no acquisitions at all, but it does raise a high bar. Gabelman sees Chevron (CVX) and Total (TOT), both of which have relatively strong balance sheets, as the most likely acquirers.

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