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Too big to merge? Big Oil avoids acquisitions

A derrick hand for Raven Drilling, works on an oil rig drilling into the Bakken shale formation outside Watford City, N.D.
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A derrick hand for Raven Drilling, works on an oil rig drilling into the Bakken shale formation outside Watford City, N.D.

With the U.S. pumping record amounts of oil, one might assume that the largest oil companies would be basking in the glow—and perhaps working out a deal or two to capitalize on the domestic boom.

But they're not.

The urge may be there to snap up smaller and more nimble oil producers, but analysts say the domestic Big Three (ExxonMobil, Chevron and ConocoPhillips) are encumbered by sprawling size and underperforming assets that make acquisitions less likely.

Even as other industries undertake a flurry of mergers amid low interest rates and a bull market, major oil companies appear gun shy on large purchases.

"They have to reinvent themselves—these companies are too big to grow," said Fadel Gheit, managing director of oil and gas research at Oppenheimer & Co. He compared the Big Three to "an aging Yankees team" that has a long history and expensive talent but that routinely underperforms.

In 2010, Exxon acquired XTO for $41 billion—a deal Gheit branded "an absolute disaster" because it failed to boost domestic production at the world's largest oil company.

"A company like Exxon would have to buy a company every year in order to keep the oil flowing," Gheit said. Because so much of the Big Three's production is focused on more prolific offshore wells, a deal on a smaller shale outfit wouldn't "move the needle," he said.

Exxon's sea-based assets "would be the equivalent production of 5,000 wells onshore. Each … deep-water well is producing 10,000 to 15,000 barrels per day, while the other guys are producing hundreds of barrels," the analyst said. "There's no comparison."

A spokesman for Chevron told CNBC that the company does not comment on merger and acquisition strateg but "is always looking for opportunities that make sense for shareholders."

A representative for ConocoPhillips—which by most measures is outperforming competitors—said it is "doing quite well" with its current strategy.

Exxon did not immediately respond to an inquiry for comment.

According to Stewart Glickman, group head of energy and materials equity research at S&P Capital IQ, the rising price of crude has hamstrung the ability of Big Oil to increase its refining margins, a traditional source of profits. The abundance of natural gas makes it hard to profit from that sector, making a deal less attractive.

"Folks that have gas operations are focusing on their gas plays and trying to wait it out," Glickman said. "There's some pressure on the upstream names because the natgas portion of their portfolio isn't delivering yet."

Deutsche Bank oil and refining analyst Paul Sankey said Big Oil was "caught flat-footed" by the breakneck speed at which domestic production unfolded.

"Big Oil is more cautious and circumspect, and there's no question they were late to the game," he said. Now, "they're in a jam. They need to do something."

The shale boom prompted a flurry of M&A activity among regional players in the second quarter, according to a recent study from PriceWaterhouseCoopers. Fifteen of those deals had values of over $50 million. With oil comfortably perched above $100 and U.S. shale production soaring, a Big Oil bid for a good company may come with a hefty price tag.

The question now is if you would "do a deal where you'd pay very high for the right [company]," Sankey said.

By CNBC's Javier E. David

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