Release the signal! After the largest merger in twenty years, production reaches a new high, and American crude oil makes a comeback.

The US Department of Energy announced last week that US crude oil production has reached a record high of 13.2 million barrels per day. Just before reaching its peak, ExxonMobil and independent oil producer Pioneer Natural Resources reached a $60 billion deal, which may indicate a resurgence of US crude oil.

Analysts believe that the rebound in US crude oil production, the continued pressure from Wall Street for cost control and high dividends, and the merger of ExxonMobil and Pioneer Natural Resources are not coincidental.

According to Statista, US oil companies reduced capital expenditures from $199.7 billion in 2014 to $106.6 billion last year, resulting in a decline in oil production, which is detrimental to economic recovery. What's even more unfavorable is that the oil giants need to use capital expenditures to pay higher dividends and stock buybacks.

According to data from the US Department of Energy, oil and gas companies spent about $75 billion per quarter last year. The department stated that the share of operating cash flow flowing to shareholders from oil companies increased from about 20% in 2019 to half of the operating cash flow.

Therefore, the oil giants hope to increase production in a "cheaper" way, and "mergers and acquisitions" have become the solution proposed by oil companies.

ExxonMobil's $60 billion acquisition of Pioneer Natural Resources is because the company can increase the productivity of Pioneer Natural Resources' oil fields through its own technology and scale, consolidate its position, and recover costs faster. If the deal is completed, the merged company will control oil reserves equivalent to 16 billion barrels in the Permian Basin, making it the company with the highest reserves in the region, with a daily production of 4.5 million barrels of oil equivalent.

This is also why, despite the drilling activities not being as frequent as before, US oil production has fully recovered. Oil companies have offset the decline in capital expenditures by increasing the productivity of individual wells.

Some analysts believe that currently, the extraction cost of Permian shale is much lower than offshore oil, with lower political risks and a shorter time required to obtain profits. This has led companies like ExxonMobil to place more bets on Permian shale rather than offshore drilling. Jay Hatfield, CEO of New York Infrastructure Capital Advisors, said:

"Super oil giants are withdrawing funds from offshore markets. They are reducing overseas development because the risks are greater."

On the other hand, from the demand side, although electric vehicles are becoming more popular, the demand for gasoline vehicles and the demand for oil in chemicals will keep the scale of the oil business at a high level. At the same time, the rise in crude oil prices also helps drive the development of the oil industry.

The Era of "Big Mergers and Acquisitions" in the Oil Industry?

In addition to ExxonMobil, Chevrolet has also acquired two smaller oil producers in the past three years. Earlier this year, it also expressed interest in Western Oil Company, one of the largest producers in the Permian Basin, although this interest has weakened in recent months. In the shale gas revolution, small and medium-sized oil producers have driven technological and production development. However, many of them went bankrupt during the oil price collapse in 2014-2015, while other medium-sized oil producers were too small to attract institutional funding, making them increasingly attractive acquisition targets in terms of cost-effectiveness.

Mark Viviano, Managing Partner of investment firm Kimmeridge Energy Management, said:

"There are too many companies here... Consolidation is the final piece of the puzzle for rationalizing the shale industry."

Dan Pickering, Chief Investment Officer of financial services company Pickering Energy Partners, believes that the current market conditions are very favorable for transactions because oil prices have recovered from their lows earlier this year, which is high enough to make sellers believe they can get a substantial return without deterring potential buyers.

What changes will there be in short-term shale oil and oil demand?

Gasoline prices often fluctuate in sync with crude oil prices. Crude oil prices have fallen from $94 per barrel in September to around $88 per barrel, resulting in a 20 cent per gallon drop in the average price of regular gasoline in the United States.

Alexandre Ramos-Peon, Head of Shale Well Research at Rystad Energy, said that the impact of OPEC's production cuts usually offsets the increase in production by U.S. domestic producers. There is currently one uncertain factor, which is whether the conflict between Israel and Hamas will cause a significant drop in Iran's oil production:

"I believe that crude oil prices will remain at current levels in the short term and should decline in the long term. But if sanctions are imposed on Iran, it will be unfavorable for consumers."

Short-term favorable factors for oil companies will not change the long-term trajectory of the oil market or carbon reduction. Ramos-Peon said:

"Achieving climate goals is more related to the long-term transformation of energy use rather than short-term production targets." He said that Rystad expects U.S. production to increase to 13.6 million barrels per day next year and to 13.9 million barrels per day by 2025. After that, predictions will become more difficult as many things can change, but oil consumption should peak before it starts to decline by the end of this century.

Ramos-Peon said that despite the increasing popularity of electric vehicles, the demand for gasoline-powered vehicles and the use of oil in chemicals will keep the oil business at a very large scale. Hatfield said that the risk of erosion to the shale oil business will make drilling companies focus more on shale oil rather than offshore drilling. He said, "In uncertain times, why wouldn't you want to get a return on investment in 3 years instead of 30 years?"

In the short term, the biggest threat to this bright outlook is that cash flow in the oil industry is significantly declining from its peak last year. According to the U.S. Department of Energy, a survey of 139 domestic and foreign producers showed that operating cash flow in the second quarter decreased by 36% compared to 2022. Analysts believe that although the profits of US oil companies have shown a decline in the second quarter earnings report, the price of crude oil has risen by $16 per barrel in the second half of the year. In the oil industry, price determines everything.