Anticipated Bold Moves in the Oil Sector's Portfolio for 2025
Anticipated Bold Moves in the Oil Sector's Portfolio for 2025
Over the past year, the oil market has been relatively calm. Crude prices are projected to finish 2024 in the low $70s, not far from their starting point. No significant supply disruptions have occurred, and demand has remained robust.
As we look towards 2025, it's hard to predict what oil prices will do. Some analysts anticipate crude staying around its current level, while others suggest a potential drop to $50 a barrel. Due to the inherent unpredictability of oil prices, I'll avoid making any predictions in that regard.
However, I'm willing to share a couple of bold predictions regarding prominent oil industry companies in 2025.
Prediction No. 1: Chevron will surpass ExxonMobil and seal the acquisition of Hess
In recent times, the oil sector has seen a spike in mergers and acquisitions. ExxonMobil kick-started this trend in October 2023 by agreeing to acquire Pioneer Natural Resources for $59.5 billion. Chevron followed suit by proposing to buy Hess for $53 billion in early November 2023. Other oil companies have also agreed to merge within the past year.
Despite the completion of ExxonMobil's acquisition of Pioneer in May 2024, Chevron's attempt to buy Hess is still pending. ExxonMobil claims that the Chevron/Hess merger agreement triggered a "change of control" provision in its joint development agreement with Hess and China's CNOOC in Guyana. This provision allows ExxonMobil the right of first refusal to buy Hess's 30% interest in the prosperous Guyana oil field.
The two companies are currently in arbitration, and a hearing is scheduled for May 2025. I predict that Chevron will emerge victorious from the legal battle. While Hess's stake in Guyana is an attractive asset, it's not the only factor motivating Chevron's acquisition. Integrating Hess's assets would bolster Chevron's existing operations in the Gulf of Mexico and Southeast Asia. It would also strengthen Chevron's U.S. onshore position with fields in the Bakken shale of North Dakota. Successfully closing the Hess deal could help Chevron outperform in 2025.
Prediction No. 2: Energy Transfer will continue its midstream sector expansion
Energy Transfer is one of the major players in the U.S. midstream sector. The master limited partnership (MLP) has diligently expanded its operations over the years, both through organically funded projects and by acquiring other midstream companies.
Energy Transfer has proven to be a dominant consolidator in the midstream sector. In the last few years, it has acquired Enable Midstream, Woodford Express, Lotus Midstream, Crestwood Equity Partners, and WTG Midstream. These deals spanned from billion-dollar mergers with smaller MLPs (Crestwood and Enable) to simpler purchases (Woodford, Lotus, and WTG).
I anticipate that Energy Transfer will continue to absorb other midstream companies in 2025. Although it has numerous options, I believe that it will acquire Western Midstream Partners that year. This MLP specializes in supplying gathering and processing services in the Delaware Basin in West Texas and New Mexico, and the DJ Basin in northeastern Colorado - two regions where Energy Transfer already operates. A merger with Western Midstream appears more likely due to the MLP's parent company, Occidental Petroleum, aiming to reduce its debt by selling down its stake. By selling its remaining interest in Western Midstream to Energy Transfer and then offloading the rest of its outstanding units to outside investors, Occidental could quickly monetize its position in the MLP and expedite its debt reduction. Consequently, this move would boost Energy Transfer's scale and growth profile.
M&A activity is expected to remain a notable trend in 2025
Mergers and acquisitions in the energy sector have witnessed a notable uptick in recent years. I expect this trend to persist in 2025, benefiting companies like Chevron and Energy Transfer by facilitating growth opportunities while enabling financially vulnerable companies like Occidental to improve their financial situations. Thus, the ongoing M&A surge is likely to create more value for energy sector investors in 2025 and beyond.
In relation to the expected M&A activity in the energy sector, investors might consider diversifying their portfolios to include companies that are actively involved in mergers and acquisitions to maximize growth opportunities. For instance, considering the finance aspect, Chevron's potential acquisition of Hess could prove to be a profitable investment for those looking for high returns. Furthermore, investing in companies like Energy Transfer, which have a track record of successful acquisitions in the midstream sector, could also yield substantial returns in 2025.