M&A (mergers and acquisitions) was a hot topic on quarterly conference calls across the oil patch over the past month, spurred by a string of recent deals. However, while some oil-company executives spoke about their openness to acquisitions, others made it clear that they have no desire to make a deal. While that could be a negotiating tactic, many oil companies believe they can create more value for their investors by standing pat than by going on the offensive.
On the prowl
Diamondback Energy (FANG -1.90%) has been on an acquisitions binge this year. The company has signed several deals, including one to acquire rival Energen for $9.2 billion in stock. These transactions have turned it into one of the largest producers in the Permian Basin while providing it with a vast inventory of future drilling locations.
However, despite all that M&A activity, CEO Travis Stice stated on the third-quarter call that Diamondback "will continue to look for assets complementary to our existing asset base that compete for capital right away within our existing portfolio, at acquisition prices that allow us to generate full-cycle returns well in excess of our cost to capital." While Diamondback does expect to be on the sidelines as it integrates the Energen deal, it has no plans to give up on M&A, which has been the lifeblood of the company.
Meanwhile, ExxonMobil (XOM -1.09%) also hinted that it's still on the prowl after making a big deal in the Permian Basin last year. When asked about the company's thoughts on M&A amid the recent increase in deal-making during the third-quarter call, Jack Williams, a senior vice president at the oil giant, said:
We do maintain the financial strength to be able to capitalize on any environment we find ourselves in that might present an attractive opportunity. And we continue to scan the market for all opportunities that play to our strengths ... So we're continuing to look.
That's evident from a more recent report suggesting that Exxon is considering a bid for privately held oil producer Endeavor Energy Resources.
We'll take a pass
However, while Exxon and Diamondback Energy remain open to making deals, several rivals have stated that they have no desire for corporate M&A. EOG Resources' (EOG -3.75%) CEO Bill Thomas, for example, said on that company's third-quarter call that "I just want to reiterate, we have no interest, no need in even thinking about expensive corporate M&A." That's no surprise; EOG Resources has long made it clear that it's focused on organically growing the company through exploration, since that generates higher returns and creates more value than most mergers.
Marathon Oil (MRO -2.51%) CEO Lee Tillman also noted that his company prefers to focus on organic expansion rather than M&A. He said on the third-quarter call that Marathon is extending its core areas in the Eagle Ford and Bakken, making small bolt-on acreage acquisitions and trades in the Delaware Basin, and exploring new areas such as Louisiana.
"This multipronged approach," according to Tillman, "provides a sustainable framework for ongoing resource-base improvement with a focus on full-cycle returns, and without the need for any large-scale M&A." While he recognized that "M&A has been very topical recently, our extensive portfolio transformation that has created a differentiated position in the four best U.S. resource plays means the hard work on our portfolio is behind us." So "large-scale M&A is not a consideration, nor is it required for our future success."
ConocoPhillips (COP -3.42%) also addressed the topic of M&A on its third-quarter call. CEO Ryan Lance noted that the company puts M&A into three buckets: leasing undeveloped land, small acreage or asset purchases, and corporate M&A. He stated that "we've been executing the first two buckets over the course of the last couple of years, as we've kind of got the company back on its front foot a little bit." For example, it bought some land in the Montney shale play in Canada, joined Marathon and EOG in an emerging area of Louisiana, and is making some small deals in Alaska to bolster its position there.
However, Lance noted that large-scale M&A is: "kind of a tough hurdle in the company, because it needs to be competitive on a constant-supply basis. And with the current prices, they're still pretty frothy for large companies or small companies and some of the bigger deals that are going on right now."
However, he did go on to say:
We watch them, we look at them all, and we know what we like. And we're patient. We're persistent. We believe that this business is going to go through cycles. And we'll always look at it and have an opportunity when another down cycle occurs.
That openness to the right opportunity is why the same report linking Exxon to Endeavor Energy Resources also suggested that ConocoPhillips was considering a bid for the company. However, unless the perfect deal falls in its lap at the right price, ConocoPhillips will likely take a pass on large-scale M&A, since it has plenty of growth embedded in its current portfolio.
Content with what they already have
While deal-making has been making a comeback in the oil patch this year, not all oil company executives are interested in taking the plunge. That's because they believe their companies already have the right resources to create long-term value for their investors. So, unless an opportunity they can't pass up comes along, many big-name oil companies plan to sit out of the industry's current consolidation wave -- and focus on growing the old-fashioned way by exploring for new sources of oil, rather than paying up to acquire existing ones.