Big upstream acquisitions are a tough sell for oil companies these days, given investors’ growing fixation on environmental issues.
Adding new oil production and the greenhouse gas emissions that inevitably result through mergers and acquisitions can be a dangerous game for companies facing mounting shareholder pressure to decarbonize their portfolio in line with the political push toward electrification.
But there is still a place for growth-oriented market deals. Most forecasts, including that of the International Energy Agency, see oil demand continuing to grow through at least 2030 and expect a long plateau for demand after that.
This means more supply will be needed to meet the growing demand for the foreseeable future. However, industry investment remains well below pre-pandemic levels, pointing to tighter markets and potentially higher prices ahead.
Even so, oil companies taking the plunge to acquire new fossil assets better have a plan to explain the rationale and benefits to wary shareholders.
ConocoPhillips appears to have achieved this feat with its $9.5 billion purchase of Royal Dutch Shell’s acreage in the oil-rich Permian Basin. The Conoco-Shell deal could serve as a model for oil companies looking to expand while keeping investors satisfied on the environmental front.
Conoco, the shares of which are up 9% since it announced the acquisition, succeeded because it anticipated investors’ concerns and proactively addressed them.
Conoco funded the deal using existing cash reserves, which keep new debt off its balance sheet and eases worries about the potential of becoming overleveraged.
Investors are also keen on milking the mature oil industry for cash these days, so it didn’t hurt when Conoco announced an immediate 7% increase in its quarterly dividend and promised further cash returns over the next decade even if oil prices drop.
West Texas Intermediate oil now trades at about $70 a barrel, but even if it falls to $50, Conoco expects to generate $80 billion in free-cash flow over the next decade and to pay $75 billion to shareholders in the form of dividends and stock buybacks.
The company also plans to sell about $2 billion of its new Permian assets as it optimizes its enlarged portfolio there, taking its divestment target by 2023 to $4 billion to $5 billion from $2 billion to $3 billion.
Conoco framed the Shell deal as an opportunity to improve its emissions profile. The company says it will improve its scope one and scope two operational greenhouse gas emissions intensity reduction targets to as little as 50% of 2016 levels by 2030.
Conoco investors get a deal that will add about 225,000 net acres in the prized Permian Basin and 200,000 barrels of oil equivalent per day in production, which will turn Conoco into a major force in one of the world’s most productive oil fields.
A key component of the deal is the fact that the Permian’s short-cycle shale oil is likely to be some of the first oil produced in the coming years, even if demand falls off faster than expected.
The deal ticks all the boxes for what shareholders should seek from oil company investments in the energy transition: no debt, low-cost supplies, a short-cycle production horizon, and a proper nod to the fact that an energy transition away from oil remains on the horizon.
Dan K. Eberhart is the CEO of Canary, one of the largest privately owned oilfield service companies in the country. Canary provides services worth about $4 million per year to Conoco operations in the Permian Basin and elsewhere.
