A new wave of consolidation is coming in the oil market

American oil companies Exxon i Chevron announced takeovers of smaller oil companies. This means the beginning of another wave of consolidation on the oil market, the largest in over 20 years. US oil companies prefer acquisitions rather than increasing their own production capacity, so as not to affect declines oil prices. This means that there will be no petrol at the stations.

Consolidations in the oil market

Exxon and Chevron have announced acquisitions of smaller oil companies, starting a new wave of consolidation in the oil market. The last such significant wave occurred at the turn of the century and led to the creation of today's major oil companies. The catalyst for the situation is, of course, the high price of oil, but also the strong dollar, which at the time of consolidation favors American companies. Companies also take advantage of the large cash resources that companies have managed to accumulate recently. This wasn't difficult because inflation-adjusted oil prices are currently 30-40 percent higher. higher than during the last major merger wave 20 years ago. The transactions announced so far may be just the beginning, as Devon is in talks with Marathon regarding a transaction worth approximately USD 20 billion.

The current wave of takeovers reflects three important phenomena. First, there is a belief that oil prices will remain high for an extended period of time. Secondly, purchases are preferred to new drilling, and this should contribute to further reduction of supply, which will protect the current high prices from declines. Third, US companies are focused on growth, from the Permian Basin shale in the US to the oil fields in Guyana.

Price-to-earnings ratios for U.S. oil companies have increased by 50% over the past year. up to 12x. This was related to significant cash transfers to shareholders. Oil companies have the highest - as much as 8%. – dividend rate and share buyback rate S & P500 index. Taking advantage of high prices oil, supply constraints and strong cash returns to shareholders, oil companies are strengthening their balance sheets and accumulating cash.

In Europe the situation is different

European energy companies such as BP and Shell are on the sidelines as their position remains more difficult. Shell withdrew from US shale, leaving BP. As the only company from Europe. The P/E ratios of both companies are approximately one third lower than those of their American competitors. It is the result of extraordinary taxation, greater levels of government intervention in Europe. And also a generally lower level of valuations of companies on our continent compared to the USA. Energy companies, even if they wanted to work towards consolidation, have much narrower room for maneuver. Instead, they are more focused on future-oriented investments in renewable energy sources.

Oil markets are reporting a deficit this year, with demand rising to 102 million. tons per day and limiting production by OPEC. American companies are breaking new records and increasing production from Brazil to Guyana. The second source of new oil is Iran, which is responsible for 4%. world production, although it still threatens to reduce production. Saudi Arabia has significant spare production capacity, producing 20% ​​more this year. less oil than last year and may take action to mitigate the price spike, even if convergence to Israel's level is delayed. It is also possible to ease the sanctions imposed on Venezuela in the near future.

About the author

Pawel Majtkowski - analyst eToro on the Polish market, which shares its weekly commentary on the latest stock market information. Paweł is a recognized expert on financial markets with extensive experience as an analyst in financial institutions. He is also one of the most cited experts in the field of economy and financial markets in Poland. He graduated from law studies at the University of Warsaw. He is also the author of many publications in the field of investing, personal finance and economy.