ExxonMobil (NYSE:XOM) recently completed its $60 billion acquisition of Pioneer Natural Resources. This strategic move significantly enhances ExxonMobil’s footprint in the oil-rich Permian Basin, one of the most productive oil regions in the United States. However, the acquisition process encountered a significant hurdle before the Federal Trade Commission (FTC) approved it. Pioneer’s CEO, Scott Sheffield, was barred from taking a board seat at ExxonMobil, a decision rooted in allegations that Sheffield had colluded with the Organization of Petroleum Exporting Countries (OPEC) to manipulate oil prices.
The FTC’s concerns stem from Sheffield’s actions during the pandemic when he urged Permian producers to limit their investments to prevent a collapse in oil prices. At that time, oil prices had plummeted to an unprecedented negative $37 per barrel, and Sheffield’s rallying cry aimed to stabilize the industry. The FTC interpreted this as collusion with OPEC, accusing Sheffield of contributing to higher consumer prices by artificially maintaining high oil prices.
This decision by the FTC has been criticized for its lack of understanding of both U.S. and global oil markets. Critics argue that Sheffield’s actions were a pragmatic response to an extraordinary crisis, aimed at preserving the industry’s stability rather than manipulating prices. Moreover, this decision is seen as an infringement on Sheffield’s First Amendment rights, as it penalizes him for expressing his views on market dynamics.
Despite the controversy, Pioneer and Sheffield chose not to contest the FTC’s decision, allowing the acquisition to proceed. However, this incident raises concerns about the potential impact of regulatory overreach on future mergers and acquisitions (M&A) in the oil sector. Executives may now hesitate to voice their opinions or take bold actions for fear of regulatory backlash and public criticism.
The oil industry has witnessed a surge in M&A activity. In 2023 alone, the Energy Information Administration reported $234 billion worth of deals, the highest since 2012. The momentum continued into 2024, with an additional $51 billion in deals in the first quarter. Among the notable transactions under FTC scrutiny are ExxonMobil’s acquisition of Pioneer, Chevron’s (NYSE:CVX) $53 billion bid for Hess (NYSE:HES), and several other significant deals.
Just weeks after ExxonMobil announced its acquisition of Pioneer, Chevron revealed its plan to acquire Hess for $53 billion. This deal is driven by the rising oil prices in the wake of the Ukraine war and production cuts by both Russia and OPEC. By acquiring Hess, Chevron aims to secure a 30% stake in the Stabroek block off the coast of Guyana, the site of the world’s largest oil discovery in a decade and one of the fastest-growing oil developments.
However, this acquisition is complicated by ExxonMobil’s 45% ownership of the Stabroek block and its right of first refusal to buy Hess’s stake. ExxonMobil has accused Chevron of attempting to circumvent this agreement by acquiring Hess, leading to a legal dispute that is now headed for arbitration. ExxonMobil CEO Darren Woods has indicated that this dispute could extend into 2025.
Adding to the complexity, Senate Majority Leader Chuck Schumer has called on the FTC to block the Chevron-Hess deal, arguing that it would consolidate too much power in the hands of Big Oil, potentially leading to higher gas prices. However, the Federal Reserve has noted that gas prices are set by local gas stations, not global oil companies. Gas station operators set retail prices based on their anticipated costs for the next fuel delivery from local distributors, highlighting the localized nature of gas pricing.
In another significant M&A transaction, Diamondback Energy (NASDAQ:FANG) announced earlier this year its intent to acquire privately-held Permian producer Endeavor Energy Partners in a $26 billion cash-and-stock deal. This acquisition would position Diamondback as the third-largest player in the Permian Basin, behind ExxonMobil and Chevron. Unlike the Chevron-Hess deal, this transaction has attracted the FTC’s attention independently, with the regulatory agency issuing a second notice requesting additional information and documentation from the involved companies.
Under the Hart-Scott-Rodino Antitrust Act, the FTC and the Department of Justice have 30 days to review a transaction and raise any antitrust concerns. The issuance of a second notice indicates that the agencies have sufficient concerns to warrant a closer look, which could lead to a court injunction to block the deal. Despite the regulatory scrutiny, Diamondback and Endeavor remain optimistic that their deal will close by the fourth quarter of this year.
Occidental Petroleum (NYSE:OXY), Warren Buffett’s favored oil company, announced in December its plans to acquire shale oil and gas producer CrownRock for $12 billion. CrownRock is a significant player in the Permian Basin, which has been a key focus of Occidental’s growth strategy. Buffett’s initial investment in Occidental in 2019 was a bet on the potential of the Permian Basin, and this acquisition aligns with that vision. By acquiring CrownRock, Occidental aims to secure low-cost acreage in the Permian, reducing its break-even costs to below $40 per barrel.
However, the FTC has also stepped in here, issuing second notices to both Occidental and CrownRock. This regulatory intervention has delayed the deal’s completion, now expected to close by the end of the year. According to Reuters, five oil patch deals have received second notices from the FTC this year, including the ExxonMobil-Pioneer, Chevron-Hess, and Chesapeake Energy (NYSE:CHK)-Southwestern Energy (NYSE:SWN) deals.
The increased regulatory scrutiny under the Biden administration has seen the FTC challenge multiple significant M&A deals, though it has lost several cases in court. Nonetheless, the heightened oversight has led to modifications of deals to gain approval or, in some cases, caused companies to abandon their plans. This regulatory environment poses a significant challenge for the oil industry as it navigates consolidation and growth amid fluctuating oil prices and geopolitical tensions.
In conclusion, the recent wave of M&A activity in the oil sector highlights the industry’s ongoing consolidation and strategic maneuvers to secure key assets and enhance operational efficiencies. However, the increased regulatory scrutiny and intervention by the FTC present significant hurdles that companies must navigate. As the industry continues to evolve, balancing growth ambitions with regulatory compliance will be crucial for the successful completion of future deals.
