NBL Noble Energy Inc

By Rebecca Elliott 

This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (April 13, 2019).

Shares in some of the biggest shale companies soared on hopes that Chevron Corp.'s $33 billion deal to acquire Anadarko Petroleum Corp. could start a wave of consolidation in the U.S. oil patch.

Pioneer Natural Resources Co., Concho Resources Inc. and Parsley Energy Inc. shares each surged more than 8% Friday, as investors speculated that bigger players' long-expected gobbling up of smaller ones could finally be at hand. Meanwhile, a broader index of U.S. oil-and-gas companies was up about 3%, compared with an increase of less than 1% in the price of crude.

The uptick was especially pronounced among companies with large positions in the booming Permian Basin of West Texas and New Mexico, where oil production now tops 4 million barrels daily, according to the Energy Information Administration.

"The game is on to acquire these companies," said Jarand Rystad, chief executive of energy consulting firm Rystad Energy. He added that companies with choice acreage in the Permian Basin are particularly attractive to oil giants looking to expand their U.S. shale footprint.

The Chevron deal also pushed investors to bet via the options market on further gains by shale stocks. Options volumes soared on Friday for companies such as Pioneer, Noble Energy Inc. and Diamondback Energy Inc.

The number of contracts that changed hands on Pioneer was 10 times the daily average over the past month, according to data from Trade Alert. The top trades were bullish contracts that would pay out if Pioneer rallied by June to $175 a share, or 4% above where the shares closed Friday.

Analysts and investors have long expected the smaller producers that pioneered horizontal drilling and hydraulic fracturing to join forces as they transitioned from exploration to development. Scale allows companies to better manage the logistical challenges of extracting and transporting oil and gas, driving down costs. Some smaller companies are starved for capital and vulnerable to takeover attempts, analysts said.

But mergers have been relatively slow to materialize as shale drillers have struggled to adjust to demands that they prioritize profits over growth. Many of the deals that did go through last year were received poorly by the market as investors questioned their value.

Shares in Encana Corp. have fallen about 26% since the Calgary-based company announced plans in November to buy Newfield Exploration Co. Concho Resources Inc., meanwhile, saw its share price fall roughly 27% since it agreed to buy RSP Permian Inc. in March 2018.

Deals in the U.S. oil patch subsequently slowed to a 10-year low of $1.6 billion in the first quarter, on the heels of a steep drop in the price of oil late last year, according to energy analytics firm DrillingInfo.

U.S. benchmark oil prices have since rebounded by about 50%, closing at $63.89 a barrel on Friday. Meanwhile, an index of U.S. oil-and-gas companies has risen roughly 35% as Wall Street has grown increasingly skeptical of the industry.

Lower valuations paired with a more stable oil price have made acquisitions more attractive, said Kris Nicol, director of corporate research for Wood Mackenzie. He named Royal Dutch Shell PLC., Occidental Petroleum Corp. and ConocoPhillips as among the likely aggregators.

"Companies are starting to take a much longer view and develop these assets like a megaproject with a complex supply chain and significant spending in concentrated areas," said Noah Barrett, an energy analyst at Janus Henderson Investors, which has about $328 billion in assets under management. "That amount of capital and logistical intensity will play well into the strengths of larger companies."

--Bradley Olson and Inyoung Hwang contributed to this article.

Write to Rebecca Elliott at rebecca.elliott@wsj.com

(END) Dow Jones Newswires

April 13, 2019 02:47 ET (06:47 GMT)

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