2023 oil and gas M&A outlook has been saved
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Perspectives
From a peak of 10% in 2014, yearly oil and gas mergers and acquisitions (M&A) now constitutes only 3% of the industry’s market capitalization. Will M&A activity continue to fall given economic and geopolitical pressures, and what’s in store for 2023 overall? Our annual oil and gas M&A outlook reveals five trends that could reshape the dealmaking landscape and provide inroads to profitable opportunities in the year ahead—and beyond.
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Geopolitical events and economic uncertainty contributed to volatile energy prices across the globe in 2022. Despite record energy prices and low valuations, M&A activity in the oil and gas (O&G) sector fell to its lowest level since 2008. This contradiction is explained in part by the end of the long-standing correlation between M&A activity and oil prices as O&G companies remain committed to capital discipline. Instead, free cash flows have been directed toward paying dividends and doing buybacks. The old drivers of M&A activity such as investing and acquiring for growth and increasing market share, seems to have been replaced by new drivers which you can read more about below.
Over the last two years, the O&G industry has moved from engaging in M&A to build resilience amid COVID-related uncertainty to building a new core—whether that be low-carbon O&G development or expansion into cleaner energy solutions. In the coming year, these drivers are expected to continue to have an impact on M&A decisions—although the total volume of activity will continue to depend in part on external factors such as the economy, interest rates, geopolitics, and new policies and regulations. But strong and efficient O&G companies have an opportunity to develop strategies to change the game in 2023 and beyond.
Looking for a deeper dive into the coming year? Download the complete oil and gas M&A outlook.
Typical objectives of O&G M&A transactions aren’t delivering the desired results. Refresh your organization’s oil and gas M&A playbook by exploring the five drivers creating opportunities.
Energy security: Secure value chains and trade |
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Partnerships and strategic alliances: Build new capabilities and skill sets |
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Operational excellence: Drive productivity and cost efficiency |
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Governance and compliance: Secure a license to survive and thrive |
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Energy transition: Scale and commercialize low-carbon businesses |
Midstream M&A currently stands at $53 billion, its second-lowest point since 2012, but the deal count increased by 36% compared to last year. Private equity and venture capital firms are increasingly divesting midstream assets, with $10.7 billion worth of asset divestitures in 2022. Moreover, equity raising and private debt placement fell by 88% between 2019 and 2022. Rising concerns around energy security and the growing role of natural gas are driving activity in gathering and processing assets along with storage assets. Consequently, the deals for gathering and processing assets exceeded transmission (pipelines and tankers) assets for the first time in a decade, accounting for nearly one-fourth of the overall midstream deal value.
Meanwhile, the proposed $12 billion acquisition offer for Origin Energy by Brookfield Renewable Partners and EIG was the largest midstream deal, which helped storage assets account for one-third of the overall deal value. The deal activity for multiple and integrated assets slowed down in 2022, with the deal value declining by nearly 66% compared to 2021.
M&A in the oilfield services sector saw 69 deals worth $13 billion in 2022, registering a growth of 35% although on a low base of 2021. However, the deal count increased by 50% year on year in 2022. Companies are preferring to acquire specific assets and build a niche capability rather than acquire multiple assets, resulting in a 55% year-on-year decline in deal value for multiple assets in 2022. A rising focus on energy security and the subsequent anticipation of exploration activities continue to drive deals for exploration-specific assets. Drilling rigs accounted for 65% of the deal value in the oilfield services sector in 2022, which is the highest share since 2005.
On the other hand, production services saw a 3% year-on-year decline in deal value in 2022, suggesting that the industry is buying assets to prepare for the next set of wells. Sembcorp Marine Limited’s $3 billion offer for Keppel Corp’s Operations and Maintenance business was the largest sector deal, and is expected to unlock synergies while increasing ESG offerings for both hydrocarbon and renewable sectors.
Continued weakness across the O&G value chain saw the downstream M&A value in 2022 decline by 60% year on year to reach $12 billion, its lowest level since 2013. Although energy security concerns prevail in the upstream and midstream sectors, they’re less pronounced in the downstream sector. In fact, transportation and storage assets only accounted for 13% and 31% of the overall downstream deal value and deal count, respectively, in 2022.
Meanwhile, investor interest in 2022 shifted from the traditional refinery assets (cracking units, LPG plants, and petrochemical units) toward customer-facing assets, which accounted for 46% of the overall deal value. Valvoline’s divestiture of its North American lubricants and automotive chemicals business to Saudi Aramco for $2.65 billion was the largest deal of 2022, accounting for 22% of the overall sector value.
Download the full outlook to drill down into these oil and gas M&A trends.
Investment discipline and a defensive oil and gas M&A strategy have helped companies to build resilience in a few ways: preserving value, delivering cash flows, optimizing portfolios, and strengthening positioning. O&G companies, lately, are seen to be embracing change by finding and creating their new core: reflected in their growing acquisitions and partnerships in the clean energy space. What’s next?
If you’d like to talk about elevating your oil and gas M&A strategy and how your organization can pivot toward clean energy, let’s set up a conversation.
Capturing value from a changed M&A market