196
FORTUNE.COM // JUNE.1.19
Inevitably, U.S. oil production growth,
on the whole, will slow, as companies pull
back on drilling. The trick for them, if oil
prices do ultimately rise, will be not ramp-
ing production back up too aggressively,
such that prices collapse again. “Hopefully
this time the industry learns its lesson,”
says Integrity Viking’s Mike Morey.
After all, Permian producers themselves
may have an incentive to keep supply—
and prices—in check. Because they can
make money on cheaper oil than many
drillers outside the U.S. can, they face
less competition when prices are low.
If the price of oil were to rise to $80 a
barrel, more foreign competitors would
start pumping too, says John Musgrave,
portfolio manager and co-CIO of Cushing
Asset Management. “Theoretically, you
almost wouldn’t want crude oil prices to
skyrocket higher.”
As for Buffett, he’s going to make money
no matter where oil prices go, thanks to
his preferred shares. That may be the most
profitable move in the oil patch in years.really just an ideal situation for companies in a great number of
respects,” Foss says. “They’ve got a complete value chain from field
to market, and with coastal access for exports right in the United
States. They haven’t had that for 30 to 40 years.”
By gobbling up Anadarko, Occidental would get to solidify its
position in this golden region even more. That said, it’s paying
a mighty big premium—$11 more per share than what Chevron
offered. And in exchange for his $10 billion, Buffett has received
100,000 preferred shares in Occidental , with an 8% annual divi-
dend. Not everyone thinks the price is justified. Occidental’s stock
plummeted 13% in the three weeks after it went public with the
Ana darko bid, with its own shareholders criticizing the high cost
of the purchase and the fact that Buffett got the sweeter end of the
deal. T. Rowe Price, which holds 2.8% of Occidental shares, had
(unsuccessfully) threatened to oust the company’s board of direc-
tors at its May shareholder meeting, complaining that management
should have let shareholders vote on the merger.
“We view the Permian as Occidental’s crown jewel,” says John
Linehan, chief investment officer of equity at T. Rowe Price, adding
that Occidental’s assets here were the “core reason” he invested
in the company in the first place. But the Anadarko deal, oddly
enough, dilutes that rationale. While the combined company will
have more acreage in the Permian Basin, he says, its overall produc-
tion will be less concentrated there, because Anadarko has a larger
share of its output outside the region. “This isn’t the race to be the
biggest,” says Linehan. “It’s the race to have the best total returns.”
“We know the Permian. It’s the foundation of our company,” says
Occidental CEO Vicki Hollub in a statement to Fortune. “But it’s not
size that matters to us. What really matters to us is not to be the big-
gest but to be the best. And I think we’ve proven that.” With regard
to bypassing a shareholder vote on the deal, Hollub said on a recent
earnings call that the company did so to ensure that it “had a reason-
able chance to make this happen,” as the Chevron agreement did not
require a vote. “We weren’t playing on a level playing field,” she said.
Chevron, on the other hand, is no worse for wear without
Anadarko. “There are plenty more fish in the sea,” says portfolio
manager Waghorn. “There’s no particular reason that Anadarko
should stand out.” In fact, now that the major oil conglomerate
has tipped its hand in terms of its acquisition appetite, a slew of
Permian producers look like potential targets. Analysts are eyeing
Pioneer Natural Resources, Noble Energy, Apache Corp., Concho
Resources, Parsley Energy, and Diamondback Energy, among oth-
ers, as takeout candidates. “I think we’re probably one deal away
from a big consolidation wave,” says Pickering. “If we see Exxon,
Shell, BP, or Total do another big transaction, I think there will be
a huge rush to find your dance partner, and there will be a signifi-
cant amount of fear of missing out.”
The signs of an imminent M&A wave in the still-nascent fracking
industry remind Pickering, the investment banker, of the dotcom
boom of the late ’90s. Back then, investors chased high growth,
throwing money at com panies despite their lack of profits—before
the market crash ultimately forced a consolidation of Internet
startups. “That’s happening in the oil patch now,” Pickering says.
2005 2010 2015 2019
MONTHLY CRUDE OIL PRICE (WTI)
SOURCE: BLOOMBERG
0
50
100
$150
MAY 14, 2019
$61.35
OCCIDENTAL PETROLEUM BATTLE FOR THE BASIN
“$60 IS THE NEW $100”
The price of oil is up 35% year to date. But
despite the occasional disruptions in overseas
production, most analysts say, there’s simply
too much oil supply to push the price much
higher than its current trading range.