Marathon Oil could be a good candidate for M&A activity, analysts say.
Wirestock/Dreamstime.comA surprise oil-and-gas merger this week could herald the start of a new cycle of mergers and acquisitions, some analysts say.
Denver oil producer Cimarex Energy (XEC) announced on Monday that it had agreed to merge with Houston’s Cabot Oil & Gas (COG), creating a company worth $17 billion, after including debt, that will have assets in several of the country’s most productive oil and gas fields. Wall Street has mostly sneered at the deal, in part because the two companies have different business models. But even though both stocks fell on Monday after the announcement, some analysts expect that other companies in the industry will latch onto the trend.
A handful of oil-and-gas companies agreed to merge last year as oil prices plunged and investors began to question whether smaller companies could survive the downturn on their own. There were even reports that Exxon Mobil (XOM) and Chevron (CVX) had considered getting together to better weather the storm. But the tie-ups slowed by the end of the year, and there have been relatively few such deals in 2021.
Oil-and-gas companies have been focused on slimming down their asset bases, drilling only their most promising wells and discarding or selling the rest. The old oil-and-gas strategy was to grow production as fast as possible when times were good, which often led them into debt troubles when oil prices turned south. Somewhat counterintuitively, companies have pitched mergers and acquisitions as a strategy to help them become more efficient. If they can cut costs at the combined company, and use their combined scale to borrow money at better interest rates, they’re more likely to produce positive cash flow even during bad times.
Paul Sankey, an analyst at Sankey Research, wrote after the Cimarex deal that companies want to get to market caps over $10 billion, putting them in better competitive positions as financing dries up for smaller firms. He thinks Marathon Oil (MRO) and Ovintiv (OVV), two producers whose caps are just below $10 billion, could be looking for partners.
Truist analyst Neal Dingmann also expects deal activity, though it may be more of the “bolt-on” variety, where companies buy acreage without purchasing an entire company.
“We believe the transactions that are likely to be most common in the coming months are a number of E&Ps making strategic asset moves consisting of adding more bolt on core inventory and selling what they determine to be non-core,” he wrote. “We believe most of this M&A will be focused in the Permian though we could see some additional activity in the Bakken, Eagle Ford, Rockies, and Haynesville.”
Like Sankey, Dingmann thinks that Marathon and Ovintiv could be candidates for M&A. He added other companies to his list of possible M&A participants too, including Pioneer Resources (PXD), Devon Energy (DVN), Diamondback Energy (FANG), Continental Resources (CLR), PDC Energy (PDCE), Southwestern Energy (SWN), Whiting Petroleum (WLL), Callon Petroleum (CPE), Northern Oil & Gas (NOG), Earthstone Energy (ESTE), Penn Virginia (PVAC), Ring Energy (REI), and Silverbow Resources (SBOW).
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