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Perspectives

2022 oil and gas M&A outlook

Rewriting the playbook on O&G dealmaking

Nearly two-thirds of oil and gas executives were highly optimistic about the strategic changes made by their organizations in the past year. Does the future hold more strategic shifts to be hopeful about, and what’s in store for 2022 overall? Our annual mergers and acquisitions (M&A) outlook takes a closer look at five trends that could reshape the oil and gas dealmaking landscape in the year ahead.

Will we see continued momentum in the year ahead?

The year 2021 was surprising in the crude oil and natural gas (O&G) industry for two main reasons: First, oil prices jumped beyond even the most bullish forecasts, by 75% year over year, to reach $75/bbl by the end of the year. Second, O&G companies showed unusually high capital discipline, with capex increasing only 17% even as oil prices rose sharply. These two elements have rewritten the O&G M&A playbook, as aggressive tactical or cyclical acquisitions have given way to restrained, strategic, and environment-focused buying in 2021.

The first half of 2021 saw the lowest level of O&G deal activity in the past 10 years, but it somewhat rebounded in the second half. Overall, global O&G M&A deal value in 2021 rose by a modest 18% to $269 billion, compared to 2020, with recoveries in upstream and oilfield services offsetting weakness in midstream and downstream.

While projected record cash flows of O&G companies at $90/bbl bode very well for O&G M&A activity, the trajectories of COVID-19 mutations and macroeconomic recovery are expected to influence activity level and pace in 2022. Fears of omicron-induced demand declines and their associated macroeconomic impact—including supply-chain disruption and inflation—may impede M&A momentum over the first half of 2022. But with rising vaccinations, a strong second half is possible. In the meantime, portfolio rebalancing and opportunities to integrate energy assets are likely to continue supporting M&A activity.

Download our 2022 oil and gas M&A outlook to learn more.

2022 oil and gas M&A outlook

Five trends that could reshape the M&A landscape


Energy transition altering the upstream deal playbook
A combination of high oil prices and accelerating energy transition has reduced valuation mismatch between potential buyers and sellers, making both comfortable to pursue M&A opportunities. Additionally, the combination is allowing buyers to balance economics and the environment by acquiring higher-margin assets while driving increased free cash flow generation and environmental, social, and governance (ESG) initiatives.

An increasing number of large O&G companies are likely to divest higher-carbon assets and consolidate their oil and gas positions to decarbonize operations and benefit from valuation upsides presented by higher oil prices. Thus, regional or low-cost hydrocarbon producers will likely closely track divestment targets of super majors and conglomerates.
Broadening consideration for ESG in dealmaking
ESG-related investments of $1.7 trillion account for about 10% of worldwide fund assets across industries. But only 10% of O&G deals in 2021 cited ESG as their key deal rationale or openly communicated their ESG consideration in deals to stakeholders. Among the very few, Bonanza Creek and Extraction Oil & Gas, for example, merged to form Civitas Resources Inc., Colorado’s first net-zero oil and gas producer.

Apart from ESG, the financial execution of the deal, the realization of synergies, robustness of the post-transaction plan, swift integration, cultural fit, and many other factors influence shareholder returns. Additionally, ESG in dealmaking isn’t just about the “E”—which has been typically the case—it’s equally about social (S) and governance (G) as outstanding social responsibility, local participation and partnering, diversity in management and workforce, and good governance business practices are also equally important in ensuring a successful deal closure. In fact, most buyers that displayed strong shareholder returns had consistently performed well across all three–environment, social, and governance—categories.
                          Expanding into new energy businesses
Major O&G companies leveraged M&A to add around 80 GW of renewable capacity between 2018 and 2021, representing 9% of global renewable capacity additions across various industries during the same period. Most of these additions were integrated solar plus storage.

However, O&G companies’ renewable M&A is witnessing a shift toward wind-based generation, particularly offshore wind, which accounted for a quarter of the total O&G-sponsored renewable capacity added in 2021. The ever-improving technology, falling turbine costs, higher economies of scale, and widening geographic range of offshore wind are making it a strategic energy source.
Changing role of energy information services
The generally less talked about energy information services (EIS)—including databases, benchmarks and indices, analytics, and several energy management, engineering, and monitoring solutions—have been instrumental in making O&G operations efficient, reliable, and cleaner over the years.

Despite their growing importance, these services often face the brunt of industry downturn as these are typically among the first to be cut amid budget constraints. And in a recovery phase, they tend to be among the last to be reinstated causing EIS to lag behind the broader industry. For instance, oil prices achieved six-year highs in 2021, whereas EIS M&A deals activity remained at the second-lowest levels of the last six years.

Shifting private equity and infrastructure fund interest in O&G
In the past decade, private equity (PE) firms have increasingly emerged as a powerful investment force in O&G. Top PE financiers have invested about $1.1 trillion in the energy sector since 2010. Scanning major PE firms worldwide, about 80% of their energy holdings since 2010 have been in oil, gas, and coal; private financiers were active in the market when global oil markets faced price and supply upheavals a few years ago. They targeted undervalued but potentially profitable O&G assets and aimed to generate profits during a rebound in oil prices.

In 2020, the slump in demand and prices resulted in the fewest fossil fuel deals from PE firms and several PE-backed shale producers filed for bankruptcy. Simultaneously, PE investments started expanding into the renewables space due to the increasing cost-competitiveness of renewable projects.

Oil and gas mergers and acquisitions by segment

Download the full outlook to drill down into these oil and gas M&A trends

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