Analysis: A mountain of asset sales loom after oil megamerger era

Marathon Oil

26/06/2024 11:00

By Shariq Khan, Sabrina Valle and Arathy Somasekhar
       June 26 (Reuters) - U.S. oil and gas companies could
face an uphill struggle to sell about $27 billion of assets to
fund investor payouts over the next few years as the biggest
wave of energy megamergers in 25 years nears the end of
regulatory reviews.
    The share buybacks and dividends are needed to lure
investors back to an industry that many have shunned over
volatile returns and pressure to decarbonize portfolios. Energy
stocks represent just 4.1% by weight of the S&P 500, a third of
their 2011 share as tech and health care investments took off.  
  
        But finding new owners for these properties is unlikely
to be quick or easy, bankers and analysts warn. There are fewer
institutional and European oil buyers interested, and a lack of
ready cash to finance these deals. The private equity firms that
once bought Big Oil's cast-offs have turned to energy
transition, social impact and renewable investments.  
    The scale of mergers has been unprecedented with $180
billion from six deals since October. Driven by a rush to add
oil reserves that can be tapped in the future, most of these
deals are expected to wrap up this year and will unleash a burst
of oil wells, pipelines, offshore fields and infrastructure
packages onto the market. The lack of ready buyers suggests
sales will take time and may turn into asset swaps, rather than
cash sales. 
    Three acquirers - Chevron  CVX.N , ConocoPhillips  COP.N 
and Occidental Petroleum  OXY.N  - have pledged to raise between
$16 billion and $23 billion combined from post-closing sales.
Exxon Mobil  XOM.N , the top dealmaker, has not disclosed a
divestiture target. But it has raised $4 billion per year in
sale proceeds since 2021.    
    In addition to fewer private-equity and international
buyers, more intensive regulatory reviews have slowed the
marketing kickoff. Some investment bankers believe the
divestitures could run well into next year. 
    
    HITTING THE MARKET
    Exxon, which purchased Pioneer Natural Resources for $60
billion in May, wants to sell a collection of conventional oil
and gas properties across the Permian Basin, to focus on higher
growth assets, a spokesperson confirmed. 
    Conoco is primed to sell Western Oklahoma gas properties
picked up in its $22.5 billion deal for Marathon Oil, and
Chevron likely will place some of Hess' Asia offshore assets
alongside its Canadian and U.S. gas packages now on the block,
people familiar with the matter said on condition of anonymity
because regulatory reviews are underway. 
    Occidental has readied a sale of West Texas shale assets
that could fetch $1 billion, and could add offshore Gulf of
Mexico and Middle East assets once its CrownRock acquisition
closes, say analysts. 
    Exxon confirmed it is exploring a sale of select
conventional oil assets in West Texas and New Mexico "consistent
with our strategy to continually evaluate our portfolio." It has
not set a new asset sale target since the Pioneer deal.  
    Conoco and Occidental declined to comment on their asset
sales targets.      
    A Chevron spokesperson said after the Hess closing "we're
going to add some assets that are going to be highly attractive"
to other companies. It could generate $10 billion to $15 billion
in pre-tax proceeds through 2028. 
    
    HURDLES REMAIN 
    "These are not the best assets in the industry," said Luis
Rhi, a portfolio manager at asset management firm Barrow Hanley
Global Investors, who believes the companies can afford to sit
pat until the market for assets improves.     
    "There is a real disconnect between the assets available and
the dollars raised to buy those assets," David Krieger,
co-managing partner at Houston energy investment firm Covalence
Investment Partners. "Dry powder for oil and gas investing is a
fraction of what it used to be," he said. 
    Europe's oil majors, burned by past forays into U.S. shale,
are not apt to return, said Brian Williams, managing director at
investment bank Carl Marks Advisors. They "have completed their
education" and have largely exited U.S. shale, he said. 
    Smaller private-equity backed firms lack the capital for
these deals, say energy advisers. In 2023, just 78% of announced
oil deals were below $1 billion in cost, compared to 94% in
2019, according to M&A advisory firm Petrie Partners.  
    "There are not a lot of sub-$1 billion acquisitions
happening," said Todd Dittmann, who has invested in energy for
several decades, mostly recently for Angelo Gordon & Co. 
    "There is an exit problem in energy private equity and
partners are not happy about it," he said. 

    WHO'S LEFT?  
    Closely-held oil companies including Hilcorp, which
specializes in buying mature fields, smaller publicly traded oil
producers, and Asian and Middle East investors are best
positioned. Japanese companies recently have shown more interest
in U.S. natural gas, say bankers.
    Hilcorp, founded by billionaire Jeffery Hildebrand, "is
chomping at the bit" to get a look at Big Oil's cast-offs, said
a person familiar with the company.  
        Elsewhere, "We continue to see interest from parts of
the globe outside Europe -- Asia, Middle East and other areas --
where there is appetite to be involved and deploy capital," said
Bruce On, a partner in Ernst & Young's strategy and transactions
group. 
    Many properties in the top U.S. shale field will be traded
away or kept for their cash flow, said Andrew Dittmar, director
of M&A at energy analytics firm Enverus.
    "There is going to be a lot of ammunition for swaps and
trades" in West Texas  and New Mexico, he said. 

    <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
ConocoPhillips to buy Marathon Oil in $22.5 bln deal in latest
energy merger    https://www.reuters.com/markets/deals/conocophillips-advanced-talks-buy-marathon-oil-ft-reports-2024-05-29/
US greenlights Exxon-Pioneer deal, alleges shale founder
colluded with OPEC    https://www.reuters.com/markets/deals/us-ftc-order-bans-exxon-mobil-pioneer-natural-resources-deal-2024-05-02/
Occidental Petroleum to expand Permian ops with $12 billion deal
for CrownRock    https://www.reuters.com/markets/deals/occidental-petroleum-buy-crownrock-12-bln-deal-2023-12-11/
    ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>
 (Reporting by Shariq Khan, Sabrina Valle, and Arathy
Somasekhar; additional reporting and writing by Gary McWilliams;
Editing by Anna Driver)
 ((Gary.McWilliams@thomsonreuters.com; +1 469-691-7668;))