The volatile oil market may trigger the consolidation of resources in the Permian Basin

• Large Permian corporations are looking to take advantage of economies of scale

• Major drillers want to seize this opportunity to expand their operations in the largest oil basin in the United States

According to a report by the Oil Price Network on December 11, the recent sharp fluctuations in oil prices will promote the integration
of enterprises in the Permian Basin.

In 2015, Saudi Arabia's efforts to cope with rising shale gas production caused oil prices to plummet, and the U.
S
.
shale gas industry saw its first consolidation boom.
Since then, consolidation has continued, albeit unevenly
.

But it's about to get another stimulus
.

According to industry executives, the recent increase in price volatility will prompt more companies to consolidate, especially in the Permian Basin, the star
of shale gas.
According to the Houston Chronicle this week, another reason for further consolidation is the uncertainty
that fossil fuels will face in the future, driven by renewable energy.

In fact, we have reason to worry
.
As the pandemic continues, the lack of evidence of mass vaccination to produce herd immunity, and the emergence of new Omicron variants, prices have fluctuated excessively, rendering the issue of herd immunity meaningless
.
In fact, the industry is now beginning to suspect that prices may be rising too high
.

Speaking to Reuters at the World Oil Congress, Scott Sheffield of Pioneer Natural Resources said, "I am concerned that oil prices will rise too high, above $
100 a barrel.
I hope it stabilizes between
$80 and $100 for the next few years.
We need stability
in the oil market.

Integration is one way to achieve stability because there will be fewer players in a field and, therefore, fewer
differing views on the right level of oil production.
For example, IHS Markit research earlier this year showed that U.
S.
shale oil production is rising
despite the reluctance of large companies to return to growth strategies.
Production is proving to be rising
thanks to small, private, independent companies with no shareholders returning cash.

Tim Leach, former CEO of Concho Resources, which was acquired by Concho and Conoco earlier this year, said the consolidation of our industry is a force
that won't slow down.
The Houston Chronicle quoted him as saying, "I think our industry needs to consolidate
.
" There are benefits to owning
scale.

These benefits include taking advantage of economies of scale and even becoming more competitive when oil prices are lower, although few seem to expect oil prices to fall
soon.
Chronon's Paul Takahashi noted that it is also easier for large companies to get funding from banks, though this may soon change as ESG puts more pressure
on lenders of underfunded oil and gas projects.

Beyond those benefits, growth through acquisitions has been a good time, and now is a better time: Higher oil prices have eased much of the company's debt, which, according to Vanguard's Sheffield, "gives you a choice.
"

He told the Houston Chronicle that this is why we have made two large acquisitions
in the past 18 months using market advantages.
I think in the next three to five years, you're going to have another consolidation cycle
.

According to Rystad Energy, total investment in the U.
S.
shale gas industry is expected to reach $18.
4 billion next year.

That's 19.
4 percent
higher than this year's spending.
However, half of the increased spending is due to rising costs, which will account for $9.
2 billion of total spending in 2022.

This is yet another reason for mergers and acquisitions in shale regions, especially given that the inflation outlook remains quite bleak, especially as the Fed is expected to end its stimulus program in March next year and start raising interest rates, which will be the beginning
of the end of cheap financing.

On the other hand, these expected developments could also lead to a slowdown
in the acquisition boom in the shale region.
For example, Enverus expects a slowdown
in acquisitions as potential buyers' acquisition targets no longer exist, the Chronicle reported this week.
Company valuations have also risen along with oil prices, and the Permian is still considered the most influential place in the shale region, and the drilling companies that own the area will be the ones
with the biggest price gains.

In this case, potential buyers can do two things: take a break to see where valuation goes next, or invest more money in acquisitions
while the industry's long-term uncertainty remains unresolved.

If the green transition picks up pace, a wait-and-see approach could save buyers money and reduce exposure
to assets that could be in trouble.
Or, if the bullish forecasters of oil prices are right, it could allow them to miss out on opportunities
that will never be as tempting as they are now.

Despite the green push, the profligate approach can be costly at a time of concern about underinvestment in new oil production, but could give buyers access to a larger resource base
.
It's not an easy choice to make, especially during the ongoing pandemic, but it may be one that some shale companies need to make
.