Exploring the shifting oil and gas M&A landscape

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 towards 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 The old drivers of M&A activity such as investing and acquiring for growth and increasing market share, seems to have been replaced by new drivers which you can read more about below.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.

Key highlights: What’s the M&A news for 2023

Debt-funded deals
Only 7% of O&G deals are funded by debt, suggesting a reluctance to undertake debt thereby minimising the impact of interest rate hikes.

Oil price and M&A decoupled
O&G M&A is decoupling from oil prices, implying that the M&A playbook is changing.

Hydrocarbon
Hydrocarbon M&A fell by 35% in 2022, across all major sectors and regions.

Clean energy
Clean energy M&A by O&G reached a record high of $32B in 2022, constituting 15% of the total deal value by O&G firms.

Natural gas
82% of upstream and midstream deals were for natural-gas-based assets in 2022.

Shale
With a 28% M&A share, the Permian continues to dominate shale plays. Marcellus is emerging as the new hot spot.

Market cap
From a peak of 10% in 2014, yearly O&G M&A now constitutes only 3% of the industry’s market capitalisation.

Supply chain
Since 2021, more than $50B worth of supply chain assets, primarily LNG, exchanged hands.

Low-carbon joint ventures
1/3 of JV’s by O&G companies are now in the clean energy space, with the highest number in hydrogen.

Improved ESG
70% of hydrocarbon deals had a buyer buying an asset/seller that had a relatively better ESG score.

Five new drivers of strategic M&A

Typical objectives of O&G M&A transactions aren’t delivering the desired results. Refresh your organisation’s oil and gas M&A playbook by exploring the five drivers creating opportunities.

Energy security: Secure value chains and trade

82% of global midstream deals were for natural gas-based assets in 2022, in sync with the growing energy security concerns related to fuel. Additionally, the buying for integrated assets and/or multiple fuels has narrowed and shifted towards specific assets/fuels. Over the past two to three years, buyers have been showing a higher interest for liquid natural gas (LNG) assets to monetise rising exports from the US, higher prices in Europe and Asia, and control the supply chain. Additionally, buyers are acquiring natural gas processing and takeaway capacity out of the Permian and Haynesville in order to export volumes from the Gulf of Mexico.

Partnerships and strategic alliances: Build new capabilities and skill sets

The Permian accounted for 28% of shale M&A activity as players aimed to improve operational efficiencies. US shale dominates upstream M&A, with the Permian still accounting for the largest share, but M&A activity increased in the Marcellus, Eagle Ford and Bakken basins. Despite the price per BOE rising to its highest level since 2014 owing to high oil prices (averaging over $90/bbl34), Permian shale valuations fell in 2022 on a $/acre basis, as premium acreage was consolidated in prior years. In contrast, several large deals occurred in premium acreage in the Marcellus and Eagle Ford, which pushed $/acre prices up in those basins.

Operational excellence: Drive productivity and cost efficiency

Five hundred deals, worth nearly $171 billion, were made by the O&G industry for clean energy assets between 2010 and 2022, with acquisitions outpacing divestitures by $43 billion as the industry increased its clean energy presence. The rising focus on an accelerated energy transition helped spur the M&A activity for clean energy assets, with an average deal count of 26 deals between 2020 and 2022, which exceeded the average deal count of 23 recorded between 2010 and 2019. The combination of solar and wind assets remained favoured, accounting for 44% of all clean energy M&A since 2010, but more recently biofuel-related assets are gaining investor interest, with $26 billion worth of deals since 2020.

Governance and compliance: Secure a licence to survive and thrive

About one-third of joint ventures (JVs) and strategic alliances by O&G companies are now in the clean energy space, with the highest number of clean energy JVs in hydrogen and related fuels (ammonia, nitrogen, sustainable aviation fuel). Additionally, the spread of clean energy JVs by O&G companies has broadened from a few energy sources (wind or solar) to a growing mix of sources, fuels and carbon-capture programmes.

Energy transition: Scale and commercialise low-carbon businesses

Buyers of O&G assets and companies are increasingly looking for sellers with a relatively higher ESG profile. Over the past five years, in more than 70% of deals, the ESG score of the seller was higher than that of the buyer. Mapping ESG scores by buyer and deal size reveals that micro to medium-sized companies are buying relatively lower-ESG-profiled assets, while large-sized companies (especially large independents and supermajors) seem to be buying ESG-friendly assets.

Energy sector mergers and acquisitions by segment

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

Building resilience and creating a new core for the path ahead

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, optimising 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 organisation can pivot towards clean energy, let’s set up a conversation.