Oil industry megadeals open fee gusher for Wall Street advisers

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Two megadeals that will reorder the US energy industry have raised hopes of a gusher of advisory fees in an otherwise moribund M&A market and set up a battle between the sector’s leading banks: Morgan Stanley and Goldman Sachs.

Chevron’s $53bn takeover of renowned operator Hess and ExxonMobil’s $60bn acquisition of shale specialist Pioneer have made oil and gas a rare bright spot for Wall Street’s dealmakers. Merger and acquisition activity in the sector is up 52 per cent so far this year, with more than $260bn in transactions, compared to a 21 per cent drop across all industries, according to Refinitiv.

Goldman and Morgan Stanley have been Wall Street’s biggest beneficiaries, Refinitiv’s data show, with each working on energy deals worth about $165bn, including transactions they have worked on together. 

Analysts believe that the Exxon and Chevron acquisitions will spark industry-wide consolidation as big oil producers bulk up in a competition to produce the cheapest barrels.

“These megadeals tend to come in sets,” said Pete Bowden, global head of energy banking at Jefferies. “The punchline is that the supermajors are getting bigger, and everyone else is going to have to think about a strategy for maintaining their relevance. I expect more dealmaking to come.”

That will turn the spotlight on the oil and gas teams at Goldman and Morgan Stanley, both of which have moved to build their energy expertise over the past decade. 

At Morgan Stanley, the investment bank brought on Greg Weinberger, a longtime adviser to Chevron who left Credit Suisse in 2019 along with several other star bankers. He joined a team including Aaron Hoover, who joined from Greenhill about a decade ago, and Paul Kwak, who joined in 2014 from Citibank. 

At Goldman, Brian Haufrect, co-head of M&A in the Americas, is a seasoned adviser to energy groups including Occidental Petroleum, ConocoPhillips and Shell. He works alongside Suhail Sikhtian, a Goldman veteran who leads a natural resources team which includes Scott Hankey, Mirko Gumpel, Dan Korich and Michael Klym.

A steady stream of smaller transactions has led to consolidation in the US shale patch since the pandemic-induced crash of 2020. But Exxon and Chevron’s latest deals — the sector’s fourth- and ninth-biggest on record — have been on a scale rarely seen since the megamergers of the late 1990s and early 2000s created the modern supermajors. 

Driving the trend is a dwindling inventory of prime drilling locations as the shale revolution that transformed the US into the world’s biggest oil and gas producer enters its twilight years. 

Companies have pulled back on organic growth under pressure from investors, who have insisted that they focus on returning cash rather than spending it on drilling new wells. That has left acquisitions as one of their few options for expansion. 

Soaring oil prices in the wake of Russia’s full invasion of Ukraine last year have, meanwhile, allowed energy groups to pay down debt and left them flush with cash for dealmaking. 

Near-record valuations are also making it easy to strike all-stock transactions — as with both the Exxon and Chevron deals — letting executives limit the downside should a reversal in energy prices hit valuations. 

“If Exxon and Chevron used cash for these deals and then the share price of oil companies went down dramatically they would look like bad buyers. Instead, if you use stock, it doesn’t really matter as much as everybody is affected equally,” one dealmaker involved in the recent transactions explained. 

Advisers argue that regulatory intervention is unlikely as Washington gears up for next year’s presidential election. With prices at the pump already elevated — and a risk of geopolitical tensions triggering further increases — they reason that the White House will not want to leave itself open to accusations that it fuelled price rises by interfering in deals. 

Analysts and dealmakers reckon that big players in the sprawling Permian Basin of Texas and New Mexico, the engine room of the US oil industry, could be among the next to strike. Conoco, Occidental Petroleum, Devon Energy and Marathon Oil have all been mooted as possible buyers. 

Smaller publicly listed Permian specialists like Permian Resources and Matador Energy have been floated as potential targets. So have the three big privately held groups — Endeavour Energy Resources, Mewbourne Oil and CrownRock — which each have large footprints in the basin. 

Other banks remain in contention to advise on such combinations. Citibank, which advised Exxon, has already worked on $102bn worth of energy deals this year, while JPMorgan has $89bn of transactions in the sector under its belt in 2023. 

Citi has benefited from its ties to Exxon, with bankers Michael Jamieson and Claudio Sauer advising on the Pioneer deal and on Exxon’s $5bn acquisition earlier this year of oil company Denbury. 

Among boutique investment banks, Blair Effron of Centerview Partners stands out as another Exxon adviser, while Evercore’s Will Hiltz, a senior managing director and seasoned oil and gas adviser, has been active on other deals. 

As dealmakers jostle, industry experts say there are conversations happening about a myriad of possible tie-ups.

“Suddenly, it seems anyone — public or private — is conceivably for sale and the industry’s buyers are scrambling to ensure they secure ownership of the best remaining assets,” said Andrew Dittmar, an analyst at consultancy Enverus.

“These deals will set the foundation for their hydrocarbon businesses for the next decade.”

Additional reporting by Stephen Gandel in New York