Bulking Up: Energy Sector Consolidation Accelerates

By Kelly Weber, CFA

Recent acquisitions in the energy sector have been credit-friendly, but future activity may be more mixed for bondholders.

The energy sector is a natural candidate for consolidation given its fragmentation and depleting resource base. Activity has accelerated recently as buyers look to take advantage of a more difficult growth environment to build scale in attractive low-cost basins.

In October, two large transactions were announced – Exxon Mobil’s (XOM) $64bn purchase of Pioneer Resources (PXD) and Chevron’s (CVX) $60bn acquisition of Hess Corp. (HES).

Both involve a US supermajor bulking up its growth opportunities through the purchase of a US-based independent producer in an all-stock transaction.

This structure is credit-friendly to all parties, but especially for the targets, which are being acquired by large, high-quality producers and experienced significant spread outperformance following the announcements.

The deals were also positive for the acquirers’ credit profiles, as they are adding high-quality assets without additional debt.

From a strategic perspective, Exxon’s acquisition of Pioneer further concentrates its position in the U.S. by extending its resource base in the Permian Basin.

Exxon intends to use its increased scale, better technology and operational expertise to drive greater efficiencies and growth opportunities from Pioneer’s asset base.

In contrast, with its acquisition of Hess, Chevron is adding premier assets in new regions, including Guyana.

We view this positively, given that Chevron’s near-term growth profile was highly concentrated in the Permian Basin and Kazakhstan.

The offshore Guyana megaproject is the crown jewel of Hess’s portfolio and should provide Chevron with low-cost growth for many years.

Looking ahead, we expect additional consolidation in the coming years as plateauing efficiencies make it more difficult for producers to grow organically.

Recent activity has been positive for company credit profiles; however, future deals could be more mixed.

The high-quality buyer pool is smaller with Exxon and Chevron integrating their recently announced deals, and we could see more consolidation in the mid-tier segment of the market, involving mergers of equals or the roll-up of smaller companies.

Recent mid-tier consolidation has been at least partially debt-financed, causing near-term credit deterioration, new issuance and spread underperformance.

In terms of positioning, we favor owning companies that are strong operators with solid portfolios and conservative management teams.

In our view, these issuers are in the sweet spot with the ability to structure potential acquisitions in a credit-neutral manner, while alternatively, having the ability to operate successfully as standalone companies or representing attractive purchase candidates.

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