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Tsvetana Paraskova

Tsvetana Paraskova

Tsvetana is a writer for Oilprice.com with over a decade of experience writing for news outlets such as iNVEZZ and SeeNews. 

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Mergers And Acquisitions To Spike Alongside Oil Prices

  • With oil prices now firmly above $90 we will likely see a surge in deals in 2022, with the potential of M&A activity booking a multi-year high.
  • While oil prices may be high, the pool of both public and private buyers is shrinking due to ESG concerns and questions surrounding the longevity of the industry.
  • While higher oil prices are likely to drive more deals, the lower buyer pool around the world means the valuations of the deals are unlikely to jump.

Rallying oil prices have been driving increased mergers and acquisitions activity in the global upstream sector in recent quarters and are set to incentivize more deals in 2022.

Deal-making and high-value deals in the sector returned in 2021 as commodity prices rebounded, international majors moved to divest non-core assets, and U.S. shale producers consolidated and built quality inventories of assets.   

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

The U.S. shale patch will likely continue driving deals value globally, and private equity-backed firms will continue to be important players in the upstream M&A deals.

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

Shrinking Buyers’ Pool   

As environmental, social, and governance (ESG) pressures rise on firms to reduce emissions, more public companies globally are putting up non-core assets up for sale as they look to make the best of their core assets while preparing to survive and thrive in the energy transition.

This, of course, leads to more assets up for grabs. Yet, buyers are fewer as more potential investors look at the ESG profile of assets and prefer immediate cash-accretive projects.

Private equity is also among those potential buyers that will be looking closely at the ESG and emissions profiles of companies and assets.

“ESG matters to private equity, and not solely because of exit routes. Some private equity funds are feeling direct ESG pressure from their ultimate owners – the limited partners.?These backers often include institutions such as pension funds, many of whom increasingly have their own net zero trajectories,” says WoodMac’s Greig Aitken, Corporate Research, and Neivan Boroujerdi, Principal Analyst, North Sea Upstream.

The limited pool of buyers in the upstream space, including private equity, will look for economically sound projects that already generate cash, the analysts say.

“New entrants, and investors who have struggled to generate adequate industry returns in the past, are unlikely to flood into the sector. For sellers looking to exit vast non-core positions, private equity buyers might be an option, but they’re unlikely to be a panacea,” Wood Mackenzie notes.

Private equity currently has mixed feelings about the increasing opportunities to invest in the upstream business, but the oil and gas industry—not only in the U.S. but worldwide—“is likely to move into a wider pool of private ownership,” WoodMac pointed out.  

Deal-Making Set For Active Year In 2022

Despite the uncertainties over the attractiveness of upstream assets in the energy transition, deal-making will likely strengthen this year as oil prices rally, analysts say.

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

“Companies’ ability to finance and execute acquisitions improved immeasurably through the course of 2021 – we can see this clearly in the increasing number of larger cash asset deals. If commodity prices remain elevated, the ability to execute transactions will only increase through 2022,” the analysts noted.

The international majors could take advantage of the current upcycle and work on disposals in all regions as they still have a lot of assets to sell, according to Aitken and Walker.

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

“The deal pipeline is robust, and the upstream M&A market looks set to continue to strengthen, with deals in the US likely to remain a crucial driver of the global deal value. Large sales in other regions may also materialize in 2022, particularly if majors continue to streamline their portfolios,” the energy research firm said in January.

Specifically for U.S. upstream deal-making, “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 in Haynesville are expected to become available on the market, while high-quality inventory remains in other areas like the Midland Basin and northeast Marcellus dry gas, although fewer sellers have put assets up for sale in those plays, according to Enverus.

“In other more mature regions like the Williston Basin (Bakken) and Eagle Ford, substantial high-production assets are likely to be placed on the market and may be available at attractive prices drawing a mix of public and private buyers,” Enverus said.

Deal Valuations Will Not Jump 

Yet, deal valuations are not expected to surge in lockstep with higher oil prices and deal activity, according to WoodMac. That’s because outside North America, the pool of traditional buyers has significantly shrunk and because potential buyers are still focused on capital discipline, especially in North America and even more so in private equity. In addition, ESG and emissions profiles will also be priced in for upstream asset valuations as potential buyers will weigh the risks of the high carbon footprint of some assets.

“This could mean that carbon price assumptions are levied on Scope 1 and 2 emissions, for example, or that additional risking is applied to long-life cash flows to account for future demand weakness,” Wood Mackenzie’s analysts said in the 2022 global upstream outlook.

By Tsvetana Paraskova for Oilprice.com

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