Mergers and acquisitions skyrocketing along with oil prices

Rising oil prices have fueled increased mergers and acquisitions in the global upstream sector in recent quarters and are likely to fuel more deals in 2022.

Deal-making and high-quality deals in the industry returned in 2021 as commodity prices rallied, international majors moved to divest non-core assets, and US shale producers consolidated and built high-quality asset inventories.

If oil prices remain high – currently at their highest level since autumn 2014 – analysts say M&A activity has a good chance of posting a multi-year high this year.

The US shale field is likely to continue driving the value of transactions worldwide, and private equity-backed companies will continue to be key players in upstream M&A deals.

However, the new realities in the global upstream market suggest that private equity will not be a panacea for transaction activity, although it will remain an option for companies looking to divest, says Wood Mackenzie.

Shrinking pool of buyers

As pressure on environmental, social and governance (ESG) companies to reduce emissions mounts, a growing number of publicly traded companies around the world are offering non-core assets for sale to make the most of their core values ​​while preparing to: to survive and thrive in the energy transition.

This naturally leads to more assets up for grabs. However, there are fewer buyers as more potential investors look at the ESG profile of assets and favor projects with immediate cash value creation.

Private equity is also among the potential buyers who will look closely at the ESG and emissions profiles of companies and assets.

“ESG is important to private equity, and not just because of the exit routes. Some private equity funds feel direct ESG pressures from their ultimate owners – the limited partners.? These funders often include institutions such as pension funds, many of which increasingly have their own net-zero trajectories,” says Greig Aitken, Corporate Research, of WoodMac Neivan Boroujerdi, Principal Analyst, North Sea Upstream.

The limited pool of buyers upstream, including private equity, will look for commercially sound projects that are already generating cash, analysts say.

“New entrants and investors who have historically struggled to generate decent industry returns are unlikely to flock to the sector. For sellers looking to exit huge non-core positions, private equity buyers could be an option, but they’re probably not a panacea,” notes Wood Mackenzie.

Private equity currently has mixed feelings about increasing opportunities to invest in the upstream business, but the oil and gas industry — not just in the US but globally — “is likely to enter a larger pool of private ownership,” stressed WoodMac.

Active year 2022 deal making kit

Despite uncertainty about the appeal of upstream assets amid the energy transition, deals are likely to strengthen this year as oil prices rise, analysts say.

Upstream M&A deal flow could hit a multi-year high in 2022 if commodity prices hold steady, said WoodMac’s Aitken and Scott Walker, senior research analyst, Upstream M&A, in their 2022 global upstream business outlook last month.

“Companies’ ability to fund and complete acquisitions has improved immeasurably throughout 2021 – we can clearly see this in the increasing number of larger cash asset deals. If commodity prices stay high, the ability to execute transactions will only increase until 2022,” the analysts noted.

The international majors could take advantage of the current upswing and work on selling across regions as they still have plenty of assets to sell, according to Aitken and Walker.

Rystad Energy also believes upstream businesses will accelerate this year after hitting a three-year high of $181 billion in 2021 and returning to pre-COVID levels.

“The deal pipeline is robust and the upstream M&A market should continue to strengthen, with US deals likely to remain a key driver of global deal value. Big sales in other regions could also happen in 2022, especially if the majors continue to streamline their portfolios,” the energy research firm said in January.

Specific to US upstream deals: “Overall, the M&A market should be set for an active 2022,” energy data analytics firm Enverus said in a report last month.

More assets in the Delaware Basin and Haynesville are expected to become available in the market, while other areas such as the Midland Basin and Dry Gas in northeast Marcellus will remain high-quality holdings, although fewer sellers have had assets for sale in those games . to Enverus.

“Other more mature regions such as the Williston Basin (Bakken) and Eagle Ford are likely to have significant, high-producing assets coming to market and available at attractive prices that will attract a mix of public and private buyers,” Enverus said.

Deal ratings don’t jump

However, according to WoodMac, deal valuations are unlikely to rise in tandem with higher oil prices and deal activity. That’s because the pool of traditional buyers outside of North America has shrunk significantly and potential buyers still rely on capital discipline, particularly in North America and even more so in private equity. Additionally, ESG and emissions profiles are also priced in for upstream asset valuations as potential buyers will weigh the risks of some assets’ high carbon footprint.

“This could mean, for example, carbon pricing assumptions being applied to Scope 1 and Scope 2 emissions, or applying additional risk to long-lived cash flows to account for future demand weaknesses,” Wood Mackenzie analysts said in Global Upstream -Outlook 2022 .

By Tsvetana Paraskova for

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