In the past, small and nimble oil companies disrupted the industry with their innovative technologies, unlocking untapped oil reserves in seemingly depleted areas. However, the tables have turned as Big Oil now reigns supreme and is poised to dominate the next phase of drilling in the United States.

ExxonMobil's recent monumental deal worth $64 billion to acquire Pioneer Natural Resources establishes Exxon as the frontrunner in the Permian Basin, the most abundant drilling region in the country.

The pandemic has acted as a catalyst for large oil companies, granting them substantial advantages in terms of both capital and technology. With the latest technological advancements, behemoths like Exxon have the financial means and extensive land holdings to drill horizontally in shale formations for up to four miles, extracting more oil and natural gas. Unfortunately, smaller drillers lack the resources and acreage needed to leverage these cutting-edge techniques.

Exxon CEO, Darren Woods, shared insights on these advancements during a conference call on Wednesday, emphasizing their commitment to increasing productivity in shale through various techniques and technologies.

It is apparent that the dynamics of the oil industry have shifted. While small players initially disrupted the status quo, the might of Big Oil now ensures that they will dictate the future of U.S. drilling.

Advantage of Big Oil Companies

Big oil companies have a significant advantage over smaller drillers in today's market. One major advantage is the higher valuation of their stocks compared to their counterparts. This valuation premium can be attributed to the fact that fewer investors are investing in oil stocks at the moment, and those who do prefer to invest in well-known and established oil companies.

For instance, Exxon, one of the leading oil companies, is currently trading at 12 times its projected earnings for the next four quarters, indicating a substantial premium. On the other hand, Pioneer, a smaller driller, was trading at a multiple of nine times before recent reports surfaced about a potential deal. Similarly, Devon Energy (DVN) trades at seven times its expected earnings.

Utilizing Valuation Heft

In an all-stock deal like Exxon's acquisition of Pioneer, Exxon can leverage its valuation advantage. This means that each dollar of earnings Exxon acquires from Pioneer is comparatively "cheaper" than its own earnings. Consequently, Pioneer's earnings are expected to hold more equity value after the transfer to Exxon.

According to TD Cowen analyst Jason Gabelman, Exxon's valuation advantage plays a crucial role in facilitating such deals. In an interview, he stated, "You need to have a currency that's going to make doing the deal accretive, and it's difficult to do large deals with mostly cash."

With their high valuation multiples and the ability to utilize this advantage in strategic acquisitions, big oil companies like Exxon maintain a prominent position in the industry. Their attractiveness to investors and financial strength enable them to pursue such deals effectively.

The Growing Potential of Chevron in the Shale Boom

Chevron (CVX), a leading energy company, has been making strategic moves in the shale industry. Currently valued at 11 times earnings, Chevron's position in the market is attracting attention. Earlier this year, the company acquired Colorado producer PDC Energy, showcasing its commitment to expansion.

Aiming for Further Expansion

Industry analysts and experts anticipate that Chevron will continue its growth trajectory through another noteworthy acquisition. The Permian Basin, a prominent shale region, is speculated to be the target for Chevron's next move. Enverus analyst Andrew Dittmar suggests that Chevron could potentially acquire major players like Devon or Coterra (CTRA).

The Shale Boom: From Small Beginnings to a Big Future

The shale boom initially emerged as a modest development. However, it is now entering a new phase where consolidation and market dominance seem inevitable. One thing is certain – the leading players will only become stronger.