The number of upstream oil and gas merger and acquisition (M&A) deals dropped by approximately 40 percent in 2020 compared to the previous year, and the value of such deals declined by nearly 50 percent during the period, according to a new report from Deloitte.
“2020 has been an unprecedented and tumultuous year for the oil and gas industry, with sustained low oil prices, massive reductions in capex and headcounts as well as record numbers of bankruptcies and debt restructurings,” observed Melinda Yee, Houston-based partner with Deloitte & Touche LLP.
Deloitte found that 138 upstream deals worth $70 billion took place in 2020, compared to 238 deals worth $134 billion in 2019. The United States accounted for 53 percent of the upstream deal count and 73 percent of deal value last year, the study also determined.
The oilfield services (OFS) segment bore the brunt of the decline in M&A activity from 2019 to 2020, Deloitte also concluded. The total value of OFS deals fell 90 percent from 2019 to 2020 – from $19 billion to $1.8 billion – during the period, the firm pointed out. The study revealed that roughly one-half the number of OFS deals occurred in 2020 compared to 2019 – 28 versus 61, respectively. Deloitte also pointed out that, for the first time since 2013, no OFS M&A transaction last year exceeded $1 billion.
Deloitte stated that it does not expect OFS M&A deal activity to accelerate in 2021 given “continued headwinds from lower demand and overcapacity in key markets.” In the upstream, it anticipates valuation uncertainty to stifle many potential transactions but sees some all-stock and low-premium deals – reducing the buyer’s risks – closing this year.
Yee also said that a foundation exists for growth in upstream M&A.
“(I)n many ways, 2020 has set the stage for a nascent recovery, and 2021 will offer an opportunity for many oil and gas companies to hit the reset button,” she said.
Yee remarked the “drag on M&A” that has been evident in the past year should diminish as companies finalize impairments, reduce liabilities via bankruptcies, and restructure or discharge debt. Given such actions by firms, “dealmaking could return to pre-2020 levels in 2021” as more financially secure companies provide the impetus for M&A activity, she noted.
“We expect to see upstream consolidation continue, particularly in the Permian, as operators look to cut costs and sustainably grow production with cashflow,” Yee commented.
The report also finds that, should oil prices remain above $50 per barrel, upstream consolidation will likely spread beyond the Permian Basin – particularly the Eagle Ford and Haynesville plays.
Some surprises
A collapse in M&A activity in the first half of 2020 was no surprise, Yee acknowledged. However, she said the robustness of an M&A pickup in some oil and gas segments during the second half of last year was surprising. She pointed that several large transactions spanning the oil and gas value chain occurred during the period, particularly in the United States.
“Another surprise was the increased dealmaking we saw in the second half of 2020 by companies looking to cut their carbon footprint,” Yee continued. “The energy transition has continued at pace – if not accelerated – during the pandemic.”
Yee said that many large oil and gas companies have shifted their strategies to respond to changing market conditions amid increasing environmental, social, and corporate governance (ESG) scrutiny by boosting investments in lower-carbon energy assets.
“To date, much of the lower-carbon M&A has focused on upstream, but we expect it to spill over into midstream and downstream,” she commented. “It is not just new investments in renewables and carbon capture. We are also seeing companies using M&A to acquire lower-carbon oil and gas assets, both in upstream as well as the natural gas space. The latter continues to draw significant investment from the major infrastructure funds and other outside investors, indicative of its appeal as a potential bridge fuel.”
Yee concluded with an overarching takeaway for M&A in oil and gas this year.
“Overall, despite the challenges the oil and gas industry faced in 2020, 2021 could be a period of growth followed by transformation as companies push to boost margins, cut emissions, and prepare for the energy transition,” she said.
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Source: Rigzone | This text was excerpted from the media outlet cited on March 1, 2021 and is provided to Noia members for information purposes only. Any opinion expressed therein is neither attributable to nor endorsed by Noia.
