Impact of global events on O&G industry
Current instability in geopolitical events is still holding down in recovery of the oil and gas (O&G) industry. However, automation and digital innovation have been considered as strategic business priorities as they will help in process optimization, asset tracking, and data management in Oil and Gas industry
Geopolitical environment
According to the BlackRock Geopolitical Risk Indicator, the current global geopolitical risks are slightly higher than the historical average. In the April’23, OPEC+ announced to cut production by 1.16 MMbbl/d as precautionary measure directed toward steadying the oil market. This move is in line with Russia’s decision to cut oil production by 500,000 bbl/d in February’23. Oil prices are expected to hit $100 bb/d, primarily due to cuts made by OPEC+ & Russia, eventually resulting in real supply reductions.
Energy security impact
The instability across global economies, triggered by different issues over the last couple of years, has highlighted energy security as one of the major issues that is affecting world right now. Energy shortages and sudden price spikes, due to a decline in reserves in existing production sources, have made companies to look out for energy transition deals in the industry and more upstream investment to explore new reserves.
Adoption of automation and digitalization to increase productivity
The digital revolution is pacing up in the energy sector and the market well positioned to transform over the next five years. The upstream digital services industry is estimated to grow from $5 billion in 2020 to $30 billion by 2025. Rather than engaging in M&A, companies are focusing on improvements in in-house automation, digitalization, and productivity. Digitization, AI and Blockchains will play crucial role in making power-generating assets more efficient, the electric grid more secure and resilient.
Global economic outlook
According to the World Bank, global economic growth will be impacted by elevated inflation, reduced investment, higher interest rates, and disruptions caused by the Ukraine-Russia war. The global economy is expected to see a growth of not more than 1.7% in 2023 and 2.7% in 2024. GDP levels in emerging and developing economies expected to be ~6% below recovery to pre-COVID-19 levels by the end of 2024. A marginal growth in global economy will keep oil and gas demand at lower level.
Source: BP, IEA, BloombergNEF
O&G companies slightly outpacing S&P 500 companies
Source: FactSet
Note: The chart has been rebased to 100; Supermajors include Exxon Mobil, Shell, Chevron, BP, Total, Eni, and Equinor.
Top Announced M&A (By Transaction Value): YTD 2023
|
Date of Announcement
|
Target
|
Target’s Advisor
|
Txn. Value (USD billion)
|
Acquirer
|
Acquirer’s Advisor
|
|---|---|---|---|---|---|
|
4-Apr-23
|
Midland Basin Assets
|
Jefferies LLC
|
$4.3
|
Ovintiv
|
Goldman Sachs & Co. LLC, Morgan Stanley & Co. LLC, and TPH&Co
|
|
28-Feb-23
|
Ranger Oil
|
BofA Securities, Inc. and Wells Fargo Securities, LLC
|
$2.5
|
Baytex Energy
|
CIBC Capital Markets and RBC Capital Markets
|
|
21-Feb-23
|
Eagle Ford asset (Chesapeake)
|
RBC Capital Markets, Citi, and Evercore
|
$1.4
|
INEOS Energy
|
|
|
28-Mar-23
|
Montney assets
|
National Bank Financial Inc
|
$1.2
|
Crescent Point Energy Corp
|
RBC Capital Markets
|
Top Announced M&A (By Transaction Value): 2022
|
Date of Announcement
|
Target
|
Target’s Advisor
|
Txn. Value (USD billion)
|
Acquirer
|
Acquirer’s Advisor
|
|---|---|---|---|---|---|
|
10-Nov-22
|
Origin Energy
|
Jarden
|
$10.2
|
Brookfield and EIG Partners
|
Citi and MUFG / UBS and JPMorgan
|
|
14-Jun-22
|
Continental Resources
|
Evercore
|
$4.3
|
Hamm Family
|
Intrepid Partners, LLC
|
|
16-Jun-22
|
Lucid Energy
|
Jefferies LLC
|
$3.6
|
Targa Resources Corp
|
Evercore and Mizuho Securities USA LLC
|
|
2-Nov-22
|
Eagle Ford assets of Ensign Natural Resources
|
Evercore and J.P. Morgan Securities LLC
|
$3.0
|
Marathon Oil Corporation
|
Morgan Stanley
|
|
6-Sep-22
|
Brigham Minerals
|
Goldman Sachs
|
$1.9
|
Sitio Royalties Corp
|
Credit Suisse Securities (USA) LLC
|
Source: Company Press Releases and Refinitiv; Data as of December 31, 2022, Figures in USD billion
Source: GlobalData
Source: GlobalData
The data is approximate and derived.
The reduced M&A activities in the sector are in sync with the sector leadership’s on-going sentiments
The global natural gas market has been more fundamentally changed for the long term than the oil market by Russia's invasion of Ukraine. There's not a lot of swing capacity, there's not a lot of inventory capacity. There's now a lot of constraints … an unexpected event today would create a different balance. We have to be very careful about turning system A off prematurely and depending on a system that doesn't yet exist and hasn't been proven.
Western sanctions against Russia are creating a parallel oil market. There is no longer a unified oil market ... With all these bans, we are creating a grey market for oil. We had a relatively transparent, well-functioning global oil market. I understand the political objective, but I don't think we have fully appreciated the consequences.
It’s important to understand and consider externalities, which are unpriced costs, and risks such as Russia’s invasion of Ukraine. This path won’t necessarily move in one direction. My hope is that we don’t take too many steps backwards. The challenges of the last year have just made it more apparent how difficult this is.
I am of a firm view that the world will need oil and gas for a long time to come. As such, cutting oil and gas production is not healthy. We’ve seen of course through 2022 the fragility of the energy system. To see prices start to skyrocket, that’s not healthy for anyone, particularly consumers.
Source: Press search, Reuters
M&A outlook for FY 2023 – Focus on green and sustainable portfolio
Oil prices have been surging since the beginning of FY 2022, resulting in high cash inflow into the O&G industry. The resultant easy availability of funds, along with factors such as geopolitical tensions, the increasing influence of ESG, and the focus on energy transition will influence M&A activities in the industry.
Consolidation will see major turnaround: The industry witnessed a slump in M&A for 2022. However, the consolidation is likely to pick up pace due to high cash generation and net cash positive balance sheets. Companies are sitting on cash reserves, which are likely to be used for accelerated M&A activities in the future. There has been a positive sentiment towards O&G companies, supported by investment growth of ~26% in S&P 500 companies. Here are the key O&G M&A deals in 2023:
- Ovintiv acquired core midland basin assets of Black Swan Oil & Gas, PetroLegacy Energy, and Piedra Resources in a cash and stock transaction for $4.3 billion.
- Ineos Energy acquired portion of oil and gas assets of Chesapeake Energy for $1.4 billion.
- BP, through its unit BP Products North America acquired TravelCenters of America for $1.3 billion.
- Baytex Energy Corp. acquired Ranger Oil Corporation for $2.5 billion.
Greener operations and stronger ESG assets: During 2022, energy transition M&A by the O&G industry was worth ~$32 billion. There was a key focus on target companies operating in biofuels as well as solar and wind technology; hence, the deals in these domains accounted for around 80% of clean energy deals. The rising focus on energy transition has helped to spur M&A activity for clean energy assets. The average deal count rose significantly to 26 deals during 2020– 2022, as compared to 23 recorded during 2010–2019. Additionally, since 2020, O&G players have formed 750 JVs in the clean energy space, thereby laying a solid foundation for M&A in this space in the years to come. Companies will likely follow this trend and mold their investment strategies accordingly. Here are the key renewable M&A deals in 2023:
- In March 2023, Brookfield Renewable Partners and EIG Partners acquired Origin Energy for $12.4 billion
- In February 2023, HQI US Holdings, subsidiary of Hydro-Quebec, acquired Great River Hydro project from Arclight Capital Partners for $2.0 billion
Diversification in downstream sector: Downstream is responding to the growing demand for eco-friendly fuel sources by diversifying its activities. This includes investments in business involved in biofuel manufacturing, renewable energy generation such as solar and wind power, and customer-facing services such as energy and fuel sales and electric vehicle charging stations. With sustained high natural gas prices projected for 2023 and beyond, investments in green hydrogen and biomethane may be more attractive than blue hydrogen.
Conclusion
M&A activities in the O&G industry are recovering at a steady pace. Moreover, we expect that M&A activities will rebound in 2023, primarily due to abundance of cash reserves E&P companies possess and the growing commodity prices. In addition, the shift toward clean energy and the emphasis on energy transition will influence companies to engage in M&A in this particular sub-sector, which will create a more optimized portfolio for O&G companies in 2023.
