The oil and gas industry is back in consolidation mode after a low point in the spring of 2020 during the worst of the oil price and demand collapse. The pace of upstream mergers and acquisitions is back to pre-crisis levels. And it is North America that leads the consolidation drive as shale firms look to lower costs, use synergies, boost cash flows, and give more money back to shareholders.
Analysts expect the consolidation in the U.S. shale patch to continue after deal-making accelerated in the second quarter of 2021. U.S. exploration and production companies continue to be under investor pressure to reduce debts and spend wisely on drilling while healing balance sheets and preparing to withstand potential future price collapses.
The highly fragmented U.S. shale patch started to consolidate in the second half of last year, after the first-half price rout led to a slew of bankruptcies and showed that some smaller independents would be better off if they combined their assets with other firms, including bigger shale players.
The merger wave in North America, as well as globally, is not over yet—neither in the short term nor in the long term, analysts say.
North America Leads Global M&As
In the first half of this year, as much as 80 percent of the global spend on deals was made in North America, Wood Mackenzie estimates. The number of upstream deals announced globally, 115, is back to the levels seen in 2019, before the crisis. Total disclosed deal spend worldwide stood at $52 billion, 10 percent below the five-year average spend, but it was nevertheless robust, WoodMac said in a recent report.
North America accounted for 80 percent of this. Further, the ten largest corporate takeovers all took place in this region, the consultancy noted.
“From in-basin scale-ups to multi-basin mash-ups, companies combined at an incredible rate,” WoodMac says.
Following a timid start to 2021 in the first quarter, the pace of U.S. upstream oil and gas deals surged in the second quarter. More than 40 deals were announced between April and June, for a combined total value of $33 billion, Enverus said in a report in July.
“That is the highest quarterly value total since 2Q19, which included Occidental Petroleum’s historic buy of Anadarko Petroleum, and is tied for the most announced deals above $1 billion since 2014,” the energy data analytics firm said.
“Responding to investor pressure to operate more efficiently, E&P companies have prioritized consolidation,” Andrew Dittmar, senior M&A analyst at Enverus, said, commenting on the data.
M&As in the United States, especially deals in the Permian, boosted global deal values with eight deals worth over $1 billion, Evaluate Energy’s Q2 quarterly M&A report showed.
Globally, a total of $35 billion in new upstream deals were agreed upon. Of this, $18 billion in new deals were reached in the Permian alone.
The global Q2 deals value “is eight times higher than the same time last year at the height of the pandemic, and a significant uptick on last quarter where $19 billion in new deals were agreed,” said Eoin Coyne, report co-author, and senior M&A analyst.
M&A Wave Set To Accelerate Globally
Deal-making is set to continue, both in the shale patch and globally.
“As long as there isn’t a sharp retreat in commodity prices, M&A activity is likely to remain strong during the second half of 2021,” Enverus’ Dittmar said of the consolidation in the U.S.
“There are numerous opportunities for further acquisitions of private E&Ps or non-core assets,” he added.
Companies with less than $10 billion market capitalization would likely find it difficult to operate sustainably in the long term, Stephen Trauber, Vice Chairman and Global Co-Head of Natural Resources and Clean Energy Transition at Citi, told the Financial Times’ Justin Jacobs in July.
“We have way too many players in the sector that are way too undercapitalized and too small to drive the efficiencies and returns that investors need, so we will continue to see consolidation happen,” Trauber said.
The consolidation trend is well underway in the U.S. shale patch and is even more advanced in Canada’s oil sands, WoodMac’s upstream and M&A directors said in a May 2021 report.
“The trend will widen and accelerate and could include a new wave of mega-mergers,” they say about an upcoming “serial consolidation” in the global oil industry in the longer-term as peak demand nears.
International oil majors will also be part of the consolidation. Still, deals involving international oil majors now go only one way—divestment, Wood Mackenzie says.
In the first half of 2021, the disclosed spend on upstream transactions for Big Oil was below $30 million—the lowest ever, according to WoodMac’s analysis.
Big Oil’s focus in deal-making now clearly lies elsewhere—the oil majors race to announce deals in low-carbon energy, for a total exceeding $8 billion in the first half of 2021 alone.
“But in upstream, transactions only went one way: disposals totaled US$7 billion across 14 deals,” WoodMac noted.
As Big Oil looks to divest non-core or high-carbon assets, deal-making will be a key theme in the coming years.
Upstream M&As are set to accelerate as America’s shale patch looks to boost cash flows and returns to shareholders and international majors aim to free up capital for low-carbon energies by selling off non-core upstream assets.