SUPERNEWS

Macro

Two Oil Deals Highlight OPEC+ Challenges Amid $23B ConocoPhillips Acquisition

OPEC+ to restore 2.2 million barrels/day by 2025; ConocoPhillips acquires Marathon Oil for $23 billion.

6/11, 05:19 EDT
S&P 500
iShares 20+ Year Treasury Bond ETF
iShares 7-10 Year Treasury Bond ETF
ConocoPhillips
Marathon Oil Corporation
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Key Takeaway

  • ConocoPhillips' $23 billion acquisition of Marathon Oil highlights US oil sector consolidation, enhancing efficiency and reducing debt.
  • Saudi Aramco's $11 billion secondary share offering underscores Saudi Arabia's continued reliance on oil revenue despite diversification efforts.
  • OPEC+ faces challenges from leaner US shale producers and growing EV market, complicating its price management strategy.

OPEC+ Production Adjustments

OPEC+ recently announced plans to unwind some of its voluntary production cuts, a move that has left the oil market somewhat perplexed. Brent crude prices initially dipped following the announcement but later saw a slight uptick. The group’s decision to maintain overall production curbs through the end of 2025 while gradually restoring 2.2 million barrels per day over the next 12 months starting in October has been met with mixed reactions. Saudi Arabian Energy Minister Prince Abdulaziz bin Salman and other OPEC+ officials have reiterated the group's stabilizing role in the market, despite the bearish sentiment among analysts and reporters.

The market's reaction underscores the complexity of OPEC+'s production strategy. The recent announcement was intended to signal stability, yet it also highlighted the potential for increased supply, which could cap any significant price rallies. This dual message has left traders and analysts trying to decipher the true impact on future oil prices.

US Oil Sector Consolidation

In contrast to OPEC+'s price management tactics, the US oil sector is focusing on consolidation and efficiency. ConocoPhillips' $23 billion acquisition of Marathon Oil Corp. exemplifies this trend. This deal is part of a broader movement towards consolidation in the US onshore oil and gas sector, aimed at improving financial resilience and operational efficiency. ConocoPhillips CEO Ryan Lance has emphasized the need for scale, efficiency, and cash payouts over mere production growth, a strategy that has paid off.

Between the end of 2019 and the end of 2023, the average net debt of the exploration and production (E&P) sector fell from 3.7 times EBITDA to 1.2 times, while aggregate free annual cash flow surged from $6.2 billion to $33.1 billion. This financial discipline has allowed energy stocks to outperform the S&P 500 by 10 percentage points. The consolidation has also led to a significant increase in the share of US shale resources controlled by major players, with just six firms now controlling 62% of the remaining resources in the Permian Basin.

Market Dynamics and Future Outlook

The oil market is currently navigating a complex landscape of supply and demand dynamics. On the supply side, US oil giants like ConocoPhillips are not chasing high oil prices but are instead focused on reducing production costs and increasing efficiency. This approach has made the US E&P sector more resilient to price volatility, posing a challenge to OPEC+'s traditional price management strategies. The continued setting of records in US oil production is a testament to this resilience.

On the demand side, while OPEC+ may find some solace in the recent slowdown in electric vehicle (EV) sales growth, the broader trend remains unfavorable for oil. EVs still account for virtually all the growth in passenger vehicle sales worldwide, and their market share continues to rise, particularly in China and North America. This shift towards cleaner energy sources is likely to exert long-term pressure on oil demand.

Street Views

  • Prince Abdulaziz bin Salman, Saudi Arabian Energy Minister (Neutral on oil market):

    "We don’t care about oil prices—$30 or $70, they are all the same to us."

  • Ziad Daoud, Bloomberg’s Chief Emerging Markets Economist (Bearish on Saudi Arabia's fiscal stability):

    "Riyadh’s slew of transformational projects have raised, rather than reduced, the public budget’s breakeven oil price."

Management Quotes

  • Ryan Lance, CEO of ConocoPhillips:

    "[Despite] the vaunted success of the shale boom... excessive spending involved had trashed the industry’s returns. Investors burned by this and mindful of climate change concerns would no longer pay up for the oil option embedded in E&P stocks."