by Eddy Ong
The oil and gas industry has long been characterized by significant mergers and acquisitions (M&A), reflecting the sector’s dynamic and complex nature. These strategic consolidations have shaped the global energy landscape, influencing market dynamics, competitive standing, and technological advancements.
The history of M&A in the oil industry dates back to the late 19th and early 20th centuries when major oil companies began to consolidate their operations to gain control over production, distribution, and marketing. One of the earliest and most notable mergers was the formation of Standard Oil in 1870, which eventually led to the company controlling nearly 90% of the oil business in the United States.
Over 60% of independent oil and gas exploration companies in the U.S. were acquired or merged between 2010 and 2020, per IHS Markit.
Majors like ExxonMobil and Chevron have grown reserves through acquisitions. For example, Exxon and Mobil merged to become ExxonMobil in 1999, Chevron acquired Texaco in 2000 and Unocal in 2005, and Conoco and Phillips merged to become ConocoPhillips in 2002.
Why some oil companies get sold or acquired
Most oil exploration companies get sold or acquired due to a mix of economic, operational, and strategic factors:
- Financial Distress or Underperformance: Struggling with high debt, low cash flow, or unprofitable operations, making it difficult to sustain independently. Exploration is expensive, risky, and requires massive upfront investment. Successful companies often need more capital than they can come up with to develop discoveries, making them attractive acquisition targets for larger firms with deeper pockets.
- Economies of Scale and Access to Resources: Big oil companies (majors) have integrated operations—exploration, production, refining, and distribution—which reduce costs. Smaller exploration firms, even if successful, often lack this scale and expertise and are acquired to plug into larger value chains.
- Risk Diversification: Exploration is a high-risk, high-reward game. Smaller companies may hit big finds but face volatility in oil prices or dry wells. Selling to or merging with a larger entity spreads risk and ensures financial stability.
- Strategic Asset Acquisition: A successful exploration company with proven marketable reserves becomes a prime target. The target company may own desirable assets (e.g., prime drilling locations, refineries, or pipelines) that align with the buyer’s growth strategy. Larger firms acquire them to boost their reserve base, especially when buying is cheaper or faster than exploring themselves and if the assets are in geographically complementary or desirable areas.
- Management and Expertise: Smaller firms often have lean teams focused on exploration but may lack the expertise or resources for full-scale production. In some cases, there may be mismanagement. Acquirers with established infrastructure can maximize the value of discoveries.
- Market Consolidation: Low oil prices or unpredictable markets can push smaller companies to sell to avoid bankruptcy or sustain operations. Industry trends toward consolidation to strengthen market position, reduce competition, or gain control over valuable assets like oil fields or infrastructure. Oil markets are cyclical. During booms, successful explorers are acquired at premium valuations. During busts, struggling firms are bought at a discount by cash-rich majors looking to consolidate and maintain competitive lead.
- Shareholder Pressure: Investors in exploration companies often seek quick returns. A lucrative acquisition offer can be hard to resist, especially if it delivers immediate payouts compared to long-term development risks. Investors may push for a sale to maximize returns, especially if the company’s stock is underperforming or a lucrative offer is on the table.
- Regulatory and Geopolitical Factors: Sometimes there may be undue exposure to regulatory and political risk if assets are not diversified. Operating in multiple regions involves navigating complex regulations and political risks. Larger firms with global reach and legal expertise are better equipped, making sales a strategic move for smaller players. Instability in operating regions or changes in government policies (e.g., nationalization risks) may drive a sale to a larger firm with better risk management capabilities. Smaller firms may struggle to comply with tightening regulations or transition to cleaner energy, prompting a sale to a larger firm better equipped to handle these challenges.
- Energy Transition: As the industry shifts toward renewables, smaller oil companies may sell to larger competitors diversifying their portfolios or exiting fossil fuels strategically.
- Exploration success: Success in exploration makes companies valuable but resource-constrained, pushing them toward acquisition by larger players who can fully exploit their assets.
Why do some OG Companies go bankrupt
Some smaller oil companies were acquired due to their exploration success, but some did not last because they went bankrupt.
The main drivers for an oil company going bankrupt include:
- Low Oil Prices: Sustained low crude oil prices reduce revenue, making it hard to cover operating costs, debt payments, or capital expenditures.
- High Debt Levels: Overleveraging, often from borrowing to fund exploration or acquisitions, can lead to insolvency if cash flows dry up or interest payments become unmanageable.
- Operational Inefficiencies: High production costs, aging infrastructure, or poor management can erode profitability, especially in competitive markets.
- Declining Reserves: Depleting oil reserves without successful exploration or acquisition of new assets limits future revenue potential.
- Market Volatility: Fluctuations in global oil demand (e.g., due to economic downturns or geopolitical events) can strain finances, particularly for companies with limited cash reserves.
- Regulatory and Environmental Costs: Stricter environmental regulations, carbon taxes, or cleanup liabilities increase expenses, especially for smaller firms with limited resources.
- Energy Transition Pressures: The shift to renewables and reduced demand for fossil fuels can devalue assets and erode investor confidence, impacting long-term viability.
- Geopolitical Risks: Operating in unstable regions or facing sanctions, nationalization, or policy changes can disrupt operations and revenue streams.
- Poor Strategic Decisions: Failed investments, overpaying for assets, or misjudging market trends (e.g., betting heavily on shale during a downturn) can lead to financial distress.
- Competition and Consolidation: Smaller or less efficient companies may be outcompeted by larger firms with better economies of scale, technology, or market access.
- Access to Capital: The inability to secure financing or attract investors during tough market conditions can push a company toward bankruptcy, especially if it relies on external funding.
- These factors often interact, amplifying financial strain. For example, low oil prices combined with high debt and regulatory costs can create a perfect storm.
Some Companies that have been acquired
- Mobil by Exxon (1999)
- Amoco by BP (1999)
- EOG Resources’ Spinoff
- Sale of Enron Oil & Gas (1999)
- Petrofina by Total (1999)
- Elf Aquitaine by Total (1999-2000)
- Arco by BP (2000)
- Texaco by Chevron (2000)
- Phillips by Conoco (2002)
- Unocal by Chevron (2005)
- Burlington Resources by ConocoPhillips (2006)
- XTO Energy by ExxonMobil (2010)
- TNK-BP by Rosneft (2013)
- BG Group by Shell (2016)
- Andeavor by Marathon (2018)
- Anadarko Petroleum by Occidental Petroleum (2019)
- Noble Energy Acquisition by Chevron (2020)
- Concho Resources by ConocoPhillips (2020)
- WPX Energy’s merger with Devon Energy (2021)
- Whiting Petroleum’s Merger with Oasis Petroleum (2022)
- Lundin Energy by Aker BP (2022)
- PDC Energy by Chevron (2023)
- Endeavour Energy by Diamondback (2024)
- CrownRock LP by OXY (2024)
- Callon Energy by Apache (2024)
- Pioneer Natural Resources by ExxonMobil (2024)
- Marathon by ConocoPhillips (2024)
- Hess Acquisition by Chevron (2025 ongoing)
Conclusion
Mergers and acquisitions have been a cornerstone of the oil industry’s evolution, shaping its structure and competitive dynamics. As the sector faces new challenges and opportunities, strategic consolidations will remain a key tool for companies seeking to navigate the complexities of the global energy landscape.
Eddy Ong wrote this article. He is a retired technical advisor living in the Dallas-Fort Worth Metroplex. He enjoys technical problem-solving, mentoring, professional networking, and idea exchange. He has an exciting international exploration career with notable E&P companies and a significant hydrocarbon discovery track record in SE Asia and W Africa. His work experience includes Passive Margin Deep Water Plays, Rift Basins, Sub Andean and M East Foldbelt and Foreland basins, SE Asian Back Arc basins, Salt basins, and Cratic Paleozoic basins.
