Drilling Into the Future - How the Oil Supermajors' Mergers Signal New Exploration Opportunities for Juniors

• Recent mega-mergers in US oil & gas signal new era of consolidation for majors
• Deals show long-term faith fossil fuels will remain crucial to meet energy demand
• Carbon capture adoption is removing emissions concerns around continued oil use
• Juniors will benefit from capital cascade as majors rationalize portfolios
• Safe jurisdictions become more attractive amid geopolitical supply disruptions

New Era of Consolidation for Oil Majors

The recent wave of multi-billion dollar mergers between US oil and gas giants signals the start of a new era of consolidation for the majors. October 2023 saw Exxon Mobil acquire Pioneer Natural Resources for approximately $60 billion, swiftly followed by Chevron's purchase of Hess for a similar sum.

According to Neil Young, CEO of junior E&P company Elixir Energy, this consolidation trend is highly reminiscent of the mergers that created today's oil supermajors in the 1990s, when the likes of Exxon, Chevron and Shell emerged from mergers between the original Seven Sisters oil companies.

After a long period of relative inaction among the supermajors, this flurry of huge deals demonstrates these giants believe there are major new opportunities to bolster their positions. For investors in the junior oil and gas exploration sector, this changing dynamic represents a very promising development.

Vote of Confidence in Continued Oil Demand

Critically, the strategic rationale underpinning these blockbuster deals is a long-term bullish view on oil and gas demand. Despite the accelerating energy transition, the supermajors clearly remain confident that fossil fuels will continue to supply a major share of the world's growing energy needs for decades to come.

As Young outlines, if oil demand were genuinely expected to enter terminal decline soon, the logical strategy for the majors would be to return capital to shareholders rather than acquiring additional reserves. The fact Exxon, Chevron and potentially other majors are pursuing these huge mergers instead signals their belief that the world will continue needing more oil and gas into the foreseeable future.

This outlook aligns with expert energy analysts like Vaclav Smil, who emphasise additions to the energy mix rather than abrupt transitions between sources. With petrochemical and plastic demand still rising exponentially alongside continued transport use, an absolute decline in global oil demand appears highly improbable in the next 10-20 years at least.

CCS Adoption Tackling Emissions Concerns

However, predicting sustained oil demand does not imply the energy transition is irrelevant. Adoption of carbon capture and storage (CCS) technology is rapidly accelerating, enabling continued fossil fuel use while tackling emissions concerns.

Recent multi-billion dollar investments in CCS companies and projects from the likes of ExxonMobil, Occidental and Chevron highlight the supermajors are now embracing this solution. As CCS costs fall thanks to technology improvements, its deployment will only increase. National oil companies like Petronas are also getting involved in CCS.

Widespread adoption of CCS will allow the oil industry to align with global emissions reduction goals while still supplying the oil and gas the world relies upon. With CCS reducing the environmental impacts, oil use may face less political and social pressure over the coming decades.

Capital Cascade to Benefit Juniors

For junior explorers, the critical implication of the supermajor merger wave is an impending capital cascade as these behemoths streamline their enlarged portfolios. As Young explains, having acquired companies like Pioneer and Hess for their cash flow and reserves, the supermajors will look to divest non-core assets.

Those assets have to find a new home in smaller companies where they remain material projects justifying further development. This rationalisation process will release high quality oil and gas properties to the wider industry, generating deal flow and funding opportunities.

Juniors have struggled to attract investor capital during the recent years of energy transition pressure. But the majors' strategic pivot back into oil and gas should unlock new funding sources from public equity markets, private equity and other institutional capital pools.

Safe Jurisdictions in Stronger Demand

Another key implication is a renewed premium on oil and gas resources located in safe investment jurisdictions with low sovereign risk. The war in Ukraine has highlighted the ability of governments to abruptly suspend operations, inflicting major losses as Shell and BP suffered.

With security of supply rising up the agenda, overseas investors are likely to favour jurisdictions with stable regulatory regimes and rule of law.

Juniors Remain Key for New Exploration

Ultimately, while the supermajors have unrivalled financial firepower to develop giant fields, juniors remain essential to spearhead new exploration in underexplored regions. The nimble junior model is suited to higher risk, higher reward exploration compared to the majors' preference for lower risk development projects.

With global energy demand set on a continued growth trajectory despite transitional forces, new oil and gas resources will need to be continually discovered and developed. As the supermajors focus on megamergers, they will rely on juniors taking on the early-stage exploration risk, while retaining the ability to farm-in on successful discoveries.

Conclusion

The surge in oil major M&A provides a ringing endorsement of oil and gas's ongoing central role in the global energy mix. Their actions suggest that peak oil demand remains distant, while accelerating adoption of carbon capture is addressing environmental concerns.

For nimble juniors focused on new exploration, this is a highly encouraging outlook. As the supermajors concentrate on mega-mergers, smaller players will benefit from asset divestments and rising capital flows into the sector. Low-risk jurisdictions leaves companies poised to realise significant upside for investors exposed to its high-impact drilling activities.