Will Mega-Merger Create New U.S. Oil Giant? Devon and Coterra to Rival Exxon: How Will It Affect Crude Markets?

TradingKey - On Thursday, Nov. 14 (ET), reports emerged that oil and gas company Coterra Energy is exploring a potential merger with Devon Energy. If the two companies reach an agreement, the deal would rank among the largest oil and gas transactions in recent years, positioning the combined entity to better compete with giants like ExxonMobil.

According to people familiar with the matter, the talks are currently uncertain and may not lead to a deal, or other bidders could emerge. Coterra has also recently engaged in merger discussions with at least one other company. Neither Coterra nor Devon has responded to requests for comment.

Following the news, Coterra (CTRA) shares rose as much as 12.3% in intraday trading Thursday before closing up nearly 1.5%, while Devon Energy (DVN) closed down 4.2%.

One of the Largest Oil and Gas Deals in Recent Years

Based on Thursday's closing prices, Coterra has a market capitalization of approximately $19.6 billion, while Devon is valued at nearly $22.3 billion. In terms of market value, if completed, this merger would be one of the largest oil and gas transactions in recent years, trailing only the two megadeals announced by ExxonMobil and Chevron in 2023.

Both companies hold significant oil and gas assets in the Permian Basin: in the Delaware Basin region of the Permian, Devon owns approximately 400,000 net acres, while Coterra holds 346,000 acres. The Permian Basin, located in West Texas and New Mexico, is the largest and most productive oil field in the U.S.

The goal of the transaction is to expand their scale in the Permian Basin, providing the combined company with core contiguous acreage in the Delaware Basin. This would allow for the drilling of longer horizontal wells and better position the firm to compete against Permian giants like Exxon and Diamondback Energy.

Why Did Coterra Surge While Devon Slumped?

The two companies' stock prices reacted quite differently to the merger news. Analysts suggest this is because the market expects Coterra, the potential acquirer, to dominate the deal and benefit more from the combined scale, while Devon, as the target, could face issues such as equity dilution.

However, there are differing views. Devon is stronger in crude oil production, while Coterra possesses significant natural gas resources. Their combination could provide asset diversification and hedge against price volatility for a single commodity during cycles of structural crude oil oversupply.

Furthermore, the combined entity would achieve economies of scale and gain stronger bargaining power in procurement. Analysts point out that the merger would effectively increase scale in the Delaware Basin; because the two companies have substantial adjacent and overlapping acreage, the combination would facilitate the drilling of longer, lower-cost horizontal wells, thereby improving efficiency.

How Will the New Giant Affect the Crude Oil Market?

Currently, the two companies are in preliminary talks and are leaning toward an all-stock transaction, though no final agreement has been reached. If successful, the combined entity would be one of the largest independent shale oil and gas producers in the U.S., capable of standing toe-to-toe with giants like ExxonMobil.

As the number of independent oil and gas producers shrinks, crude oil pricing power is increasingly concentrated in the hands of industry giants. Supermajors like Exxon and Chevron effectively control supply chains and infrastructure costs due to their scale advantages. The potential merger of Coterra and Devon signals an accelerating pace of consolidation in the U.S. shale industry, which will further increase concentration and squeeze small and medium-sized players out of the market.

Analysts believe the merger will not impact crude oil prices from a supply-demand standpoint; however, as oil giants exert greater control over production, the industry's tendency to suppress oil prices through unchecked production growth will further decrease, establishing a firmer floor for oil prices.