Following a slump in dealmaking last year, the oil and gas industry is hitting the reset button in 2021, as operators are making deals with an eye to consolidate and reduce their carbon footprints.
Although the year is young, two recent analyses demonstrate the difference between the slumping activity last year and what may be at hand as this year moves forward.
Deloitte issued a lookback at 2020 activity and offered an upbeat forecast for 2021. Singapore-based Finbrook Pte Ltd. on Tuesday gave a vote of confidence for this year in its review of February activity, which showed dealmaking was on the rise through February in North America and beyond.
Low Blow
A confluence of events brought on by the pandemic led to the lowest level of dealmaking last year in more than a decade, said Deloitte.
“Deal value fell below $30 billion in the first half of the year, also the lowest in the decade, but rebounded to almost $170 billion in the second half,” Deloitte researchers said. “The impact was felt across all segments,” with the oilfield services (OFS) sector taking the biggest hit.
Of the 10 largest global mergers and acquisitions (M&A) last year, five were in the upstream, four were in the midstream sector and one was in downstream. Seven of the 10 were in the United States.
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Overall, last year’s upstream dealmaking values slumped by 50%, while the count was off by 40% from 2019.
“Though there were several North American all-stock, low or no-premium transactions, that did not translate into a broader pickup in upstream dealmaking,” researchers said. “There were 138 deals worth $70 billion in 2020, compared with 238 deals worth $134 billion in 2019.”
Midstream transactions proved more resilient, led by China Oil and Gas Pipeline Network Corp.’s $55.5 billion acquisition of assets from China Petroleum & Chemical Corp., aka Sinopec, and PetroChina Co. Ltd.
“Midstream deal count halved year-on-year, but value was up more than 30%,” Deloitte’s team noted. “There were 42 midstream deals worth $106 billion in 2020, compared with 81 deals worth $79 billion in 2019.”
Meanwhile, only 28 OFS transactions were announced last year worth $1.8 billion, compared with 2019’s 61 transactions worth $19 billion. Downstream transactions also were off, but partially redeemed by a single large transaction, that being Marathon Petroleum Corp.’s $21 billion sale of the Speedway retail business to 7-Eleven.
Also slumping was transaction activity among Middle Eastern national oil companies, with the absence of megadeals as in 2019. Two years ago, Saudi Arabia Oil Co., aka Aramco, eclipsed all other M&A with its $69 billion takeover of Saudi Basic Industries Corp., or Sabic.
In the downstream sector, there were 50 deals worth $40 billion in 2020, compared with 53 worth $115 billion in 2019.
Transitioning Assets
While last year’s transaction numbers were underwhelming, 2021 “could be a period of growth followed by transformation, as companies push to boost margins, cut emissions and prepare for the energy transition,” said researchers.
“The industry likely needs to hit the reset button. The more than 100 upstream and OFS bankruptcies in 2020 can help reduce the significant debt overhang weighing on dealmaking and increase the number of asset packages on the market at attractive prices.”
Bankruptcies could remain elevated, which would allow debt-ridden operators to restructure. However, many “are still overspending, overleveraged and often overextended. Consolidation to achieve economies of scale can drive costs down so they can operate within their cash flows, as access to outside capital has dried up for many — otherwise, the sector may find itself in the same position during the next economic shock.”
New capital sources also may be necessary. Researchers noted that since 2016, issued equity, initial public offerings, venture capital and private equity investments “have dropped to almost zero — replaced often with debt.”
The trend of all-stock deals, several of which were announced in the Permian Basin last year, “will likely continue into 2021 as companies try to get deals across the finish line while balancing commodity price risks and wide valuation spreads between buyers and sellers.”
Higher prices might encourage larger-scale combinations beyond the Permian, such as in the Eagle Ford and Haynesville shales, “but it remains early days.”
Enverus in January had reported that nearly all the dealmaking in the final three months of 2020 revolved around the Permian, led by the $9.7 billion takeover of Concho Resources Inc. by ConocoPhillips.
‘Gathering Pace’
As the energy transition accelerates, companies also are likely to face more investor scrutiny, which in turn could lead to more divestments. Acquiring lower-carbon oil and gas, along with a portfolio of renewables and electrification, “will likely play a role in how oil and gas companies can build more resilient portfolios while potentially boosting their return on capital in volatile commodity markets.”
Finbrook’s team agreed, offering an assessment of February activity compared to January.
Global upstream M&A activity “gathered pace” last month, with an estimated $13.1 billion worth of deals versus $1.75 billion reported in January.
Finbrook tracked 39 global transactions announced during February, including 33 asset deals and six corporate deals. Thirteen were in the United States.
The top five deals last month “accounted for nearly 90% of total deal value” or $11.4 billion. Among the most significant was between Canada’s Arc Resources Ltd. and Seven Generations Energy Ltd., a $6.4 billion combination that would create one of the top natural gas operators in the country, with output centered in the Montney Shale.
Another big North American deal tracked by Finbrook was Equinor ASA’s $900 million deal to sell its Williston Basin assets in Montana and North Dakota to EnCap Investments-backed Grayson Mill Energy.
“Deal flow is expected to continue to gain momentum through the first half of 2021, driven by strong oil prices and the global economic recovery,” said the Finbrook team. “Private equity-backed players and well funded independents continue to seek distressed asset and corporate opportunities, while international majors focus on previously announced portfolio rationalization initiatives to release capital geared toward accelerating energy transition and renewable energy investments.”