High oil prices can boost the stocks of major oil companies. However, lower prices might actually offer better opportunities for value creation. When oil prices drop, companies that are struggling may sell off assets for quick cash, while those with savings can scoop up these bargains.
Currently, oil storage has seen a significant increase this year due to OPEC ramping up production. The International Energy Agency (IEA) anticipates an oversupply of 4 million barrels per day next year. OPEC has indicated it will hold back on further production increases, and restrictions on Russian oil might affect exports, yet oil prices could still decline.
Recent trends show that mergers and acquisitions (M&A) are becoming more likely. Despite an abundance of oil, many drillers are concerned about running out of reserves. Goldman Sachs points out that by 2024, the oil industry will have only about 10 years of proven reserves left, a drop from 13 years in 2013. To maintain stability, companies will need either exploration successes or to consider acquisitions.
The key question is which companies will merge. US giants like Exxon and Chevron are in a better position compared to their European peers. They maintain healthy balance sheets and can use their well-valued shares to acquire rivals.
Recently, most mergers and acquisitions have occurred in the US, especially in the Permian Basin. Companies like Apache and Devon Energy may become attractive targets as their larger projects appear more valuable than their market caps.
In Europe, companies like Equinor and Shell have stronger balance sheets, but there are fewer viable targets. For instance, Portugal’s Galp has a market cap of €12 billion and has shown impressive exploration results in Namibia, although it also has a rising share price and a mix of downstream assets.
Some companies, like Kosmos Energy and Tullow, are heavily in debt and could feel the effects of a downturn. Tullow is selling off assets to manage its debts, which are much larger than its market cap.
A potential way to secure long-term growth is by partnering with other firms. BP, for example, might seek partners for its Bumerangue discovery in Brazil. While these kinds of collaborations may not be as thrilling as big mergers, they still offer European majors a chance to be more active in their strategies.
Failed to publish!