In every industry, part of the business landscape is the mergers and acquisitions which results in bigger companies. Just because they are bigger does not mean they automatically are successful; the companies still must execute to meet customer demands. As well as the commodity inputs have to remain relatively constant. In high profile mergers, after they have been announced, then it is time to evaluate what is the expectation the mergers will succeed?

In an article by Clifford Krauss of the New York Times News Service, ExxonMobil and Chevron announced mergers of $50 billion each to buy a competitor. Exxon bought Pioneer Natural Resources and Chevron bought Hess Corporation.

Exxon believes the added acreage of Pioneer Natural Resources in the Permian Basin will add significantly to its cash flow. Chevron believes Hess ownership in a well off the coast of Guyana will mean it has significant oil to produce well in 2030’s.

On the other side of the equation is a report by the International Energy Agency which says the demand for oil and gas should peak in 2030 as sales of electric cars and other use of renewable energy surges.

If you add the sales of electric cars, mopeds and bikes, 1 out of every 5 new vehicles sold this year will be battery powered, up from 1 out of every 25 in 2020. Will that be closer to 1 out of every 2 in 2030?

Daniel Yergin who wrote the book The Prize which deals with an earlier mergers in the oil industry, believes consolidation is about giving the companies the scale to be more resilient to meet various priorities at the same time.

Mr. Yergin says oil executives have conflicting signals from Washington, on one hand produce more oil and gas domestically, but not on federal lands and waters. On the other hand, the administration wants the companies to lead in energy transition.

At the moment, oil prices are in the $80 range per barrel. If it stays in that range, the companies make money, if demand falls the price is likely to fall.

When Exxon merged with Mobil, the prices were near the bottom.

For the big American based oil companies, the one thing they are not doing is straying from what they know best. Some of the European based oil companies are investing in non oil and gas production or alternative energy.

Linking to dividend paying stocks, profitable companies often buy other companies and then they have to execute to ensure the reason why they were bought, and market conditions demand they buy the company. The economy goes in cycles and in every cycle, there is plenty of money that is invested in companies that do not execute on their mergers, in hindsight it would have been better to invest in Treasury bills. However, that is only in hindsight. As an investor you can do is evaluate if the merger is good for the next year? 5 years? or should you look for alternatives for the only perfect answer is in hindsight, but we live in the present.

There are more questions than answers, till the next time – to raising questions.