Written by Robert Siran
(Reuters Breakingviews) – The United States’ transformation into the world’s largest oil producer has been dramatic. That’s almost over. Thanks to a combination of declining prime acreage and modest market prices for oil, the game for producers who turned America’s shale belts into free-flowing gushing grounds is now to squeeze value out of what they get. Monday’s $47 billion deal to combine Devon Energy and Coterra Energy in an all-stock merger is a perfect preview of what will happen when the growth spurt ends and the oil boom’s mature middle years begin.
U.S. oil production has increased rapidly over the past decade. This is largely due to hydraulic fracturing, which has made exploration and exploitation of shale formations possible.
However, production from new wells tends to decline by 80% over two years. Producers are burning up the best unused land. Production is already declining in some oil fields, such as North Dakota’s Bakken. Typically, a drilling contractor may just drill a new well. The problem is that oil companies need about $62 a barrel to break even in the Permian-Delaware subbasin, according to a recent Dallas Fed study. That’s up from $52 a barrel in early 2020, and will rise further as the best land is drilled. Uncertain U.S. energy policy and tariffs on inputs like steel are not helping. The key West Texas Intermediate benchmark is just below $62.
Therefore, it makes sense to bring together Devon and Kotera, which have deep dominance in the Permian. The companies estimate they will realize $1 billion in cost savings by combining their operations. Once taxed at the statutory corporate tax rate and capitalized, the company would be worth about $8 billion, distributed roughly evenly among the shareholders of both companies.
This surplus will help reduce break-even well costs, but since the economics of new development are at risk, it would be better to return it to shareholders. Devon was already planning to hit the road in 2026. The company has now committed to raising its dividend by more than 30% and repurchasing more than $5 billion of its own stock after the deal closes.
The key for Devon and other U.S. shale producers will be to use their position as marginal producers wisely. These spigots can be started in a fraction of the time of traditional wells. By accumulating financial power, it can take advantage of sudden spikes in oil prices. Considering the industry’s boom-and-bust history doesn’t usually inspire confidence in such smart plans. Some consolidation may be a sign of wisdom as this oil cycle ages. Follow Robert Cyran on Bluesky.
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