Insights
U.S. upstream M&A leads to production efficiencies
A wave of consolidation through mergers and acquisitions in the U.S. upstream sector has enabled operators to improve production efficiency.
ExxonMobil stands out as a recent example, with fellow U.S. producers Expand Energy, Devon Energy, Diamondback Energy and Permian Resources all looking to benefit from recent acquisitions of their own.
Deal making enables companies to gain economies of scale as well as new technical expertise and can offer greater flexibility in directing labor and expenses to better assets.
The third quarter of 2024 was ExxonMobil’s first full quarter of production following its acquisition of Pioneer Natural Resources.
Source: ExxonMobil Q3 Results Presentation – Available via Evaluate Energy Documents
Executives at ExxonMobil said Pioneer’s expertise in the Permian will help the efficiency of recovering oil and gas in the Permian. CEO Darren Woods said the “full synergies“ will be outlined later in December but are already “considerably higher than expected.”
“Combining our technology, Pioneer’s contiguous acreage, and the capabilities of our two organizations is allowing us to recover more resource, more efficiently, with a lower environmental footprint,” he said during the company’s Q3 earnings call.
ExxonMobil is now leveraging Pioneer’s world-class water infrastructure network, remote logistics operations, best practice on drilling and completions, and knowledge-base on materials and services, said Woods.
“Developing thoughts and approaches that neither organization came up with independently is manifesting itself in additional synergies,” said Woods. “We’re bringing those synergies to the bottom line faster than we had anticipated, and they’re larger than we had anticipated.”
Drilling and completions savings
Expand Energy, formed by the merger of Chesapeake Energy and Southwestern Energy, expects to achieve $50 million a year in operational savings, with at least $130 million attributed to drilling and completion efficiencies.
Source: Expand Q3 Results Presentation – Available via Evaluate Energy Documents
“We really wanted to combine the two companies’ data sets, assess the implications of various design changes and their impact on productivity, and therefore wealth economics,” said Josh Viets, Chief Operating Officer, during Expand Energy’s Q3 earnings call.
The merger will also allow Expand Energy to better market gas to premium markets.
- Expand has assets in the Haynesville, close to Gulf Coast LNG demand.
- It also operates across northeast Pennsylvania, West Virginia, and the Ohio areas of Appalachia that are close to AI and data centre demand
Source: Expand Q3 Results Presentation – Available via Evaluate Energy Documents
“One of the things we really like about our portfolio is the geographic diversity that allows us to be responsive to both of these really significant trends in demand in the industry,” says CEO Nick Dell’Osso.
Devon Energy completed its acquisition of Grayson Mill Energy at the very end of Q3 and has seen immediate benefits through shared infrastructure and capital programs, according to Clay Gaspar, Chief Operating Officer.
Gaspar echoed ExxonMobil’s Woods that there is immense potential in combining the technical knowledge of the two companies.
“Take for example, the refracs, and all that experience and that wisdom coming together to figure out how we can do it better,” said Gaspar. “We probably won’t tally it up every time we have one of these wins, but that’s certainly an accretive part of the value proposition.”
Quantifying improvements
Companies are also measuring production efficiency after a merger or acquisition by looking at lease operating expenses (LOE) and gathering processing and transportation (GP&T) costs.
Devon Energy, for example, said its LOE and GP&T costs are expected to be $9.40/boe in Q4 2024, up from $8.45/boe in Q3 2024. Gaspar said the company will subsequently “continue to refine that and look for opportunities to reduce costs.”
Permian Resources expects its Q4 LOE costs to rise slightly from $5.43/boe in Q3 due to the recently-completed acquisition of Occidental’s Barilla Draw asset in the Delaware basin.
“That asset, I’d say, we expect really quickly to get it back to something close to where [LOE] historically is,” says Permian Resources co-CEO Will Hickey.
Improving the LOE figures of acquired assets can involve integrating technologies, applying operational standards, and renegotiating supplier contracts to ensure consistency with existing operations.
Diamondback Energy CFO Kaes Van’t Hof said the company’s recent acquisition of Endeavor Energy Resources will improve its LOE figures significantly.
The company expects an improvement of $0.50/boe in its LOE costs as a result of using Endeavor’s water business, rather than paying a third-party fee for water disposal and handling.
Van’t Hof says the company’s post-dividend breakeven will fall from $40 per barrel to $37 per barrel following the acquisition.
“We’ve already learned some things from the Endeavor side and vice versa. I think that’s all going to occur to the benefit of our shareholders through more free cash flow over a longer period of time,” he said.