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Are Investors Falling Out of Love With Oil & Gas Mergers?

Kaibalya Pravo Dey

Mergers and acquisitions in the oil and gas industry are the current hot topics in the energy sector. While companies are looking for  expansion and synergy derivations, investors are putting pressure on value creation and higher returns. They are no longer supporting drilling programs and expansions in the absence of strong cash flows amid low commodity prices. Investors want these companies to reduce costs, improve internal efficiencies, boost share repurchases and increase returns.

The recent oil and gas merger deals further depict the tussle between these two different intentions.

Callon to Buy Carrizo

Callon Petroleum Company CPE is currently under the microscope as investors are closely watching the stock and monitoring its move to acquire Carrizo Oil & Gas, Inc. CRZO. While Callon expects the acquisition to create large-scale development opportunities, its key shareholder Paulson & Co. — a private investment management firm — is wary of the deal.

The all-stock deal — valued at around $3.2 billion — is expected to accelerate operational and capital efficiencies. However, the addition of Eagle Ford acreages to Callon’s portfolio denotes that it will lose the pure-play Permian status. Investors are sceptical about this change in status quo as the buyout can reduce the company’s attractiveness to potential acquirers. Moreover, Paulson & Co. stated that the deal requires Callon to pay 25% premium to Carrizo, which is “unjustifiable”. Notably, its shares declined 15.9% following the acquisition news and since then, the stock has tumbled 38.8%, which further validates that investors were not impressed with the deal.

Parsley to Acquire Jagged Peak

Another upstream company Parsley Energy PE recently decided to acquire smaller rival Jagged Peak Energy JAG in an all-stock deal worth $2.27 billion. The move is expected to leave a positive impact on its 2020 cash flow, and generate net asset value and returns on invested capital. Additionally, the Permian pure play will be able to curb general and administrative costs by almost $25 million in the first year followed by $40-$50 million annual savings subsequently.

However, following the announcement of the transaction, shares of Parsley Energy fell 10.6% and that of Jagged Peak Energy slid almost 1.5%. Particularly, shareholders of the Zacks Rank #3 (Hold) company, Parsley Energy, appear to question the logic of gaining scale through buyouts amid weakness in oil prices. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.  

Going With Investors’ Flow

While the above-mentioned companies are looking for expansion, relatively larger energy companies are streamlining their global upstream portfolios. The largest publicly-traded energy company, Exxon Mobil Corporation XOM recently jettisoned some Gulf of Mexico assets in favor of Brazilian and Guyanese prospects.

Upstream major ConocoPhillips COP recently announced an accord with Santos Ltd to divest its Australia-West properties for $1.4 billion. It is now expected to allot the proceeds for U.S. shale developments that are likely to generate lucrative returns for its shareholders in the long run. Another energy giant Royal Dutch Shell plc RDS.A is planning to divest $10 billion assets in the 2019-2020 period, while completing a $25-billion stock buyback by the end of 2020.


As is evident from the aftermath of both the merger deals of Callon Petroleum and Parsley Energy, investors are unimpressed with the benefits of the acquisitions. Instead, they want internal efficiencies and higher returns. They feel that oil and gas companies might have been better off taking a more disciplined approach to capital deployment for maximizing shareholder value.

With no immediate improvement in commodity prices in sight, the oil and gas scenario is not expected to change anytime soon. As such, companies making complementary acreage addition to the portfolio, no matter how profitable they might be, will likely keep facing the wrath of investors, who want more returns from their investments.

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Royal Dutch Shell PLC (RDS.A) : Free Stock Analysis Report
Exxon Mobil Corporation (XOM) : Free Stock Analysis Report
Callon Petroleum Company (CPE) : Free Stock Analysis Report
Parsley Energy, Inc. (PE) : Free Stock Analysis Report
Carrizo Oil & Gas, Inc. (CRZO) : Free Stock Analysis Report
ConocoPhillips (COP) : Free Stock Analysis Report
Jagged Peak Energy Inc. (JAG) : Free Stock Analysis Report
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