Energy: US Deals 2023 midyear outlook

Oil and gas companies eye asset deals

Deal activity in the oil and gas sector is expected to focus primarily on asset sales in the coming months, as energy companies look to clean up balance sheets, capitalize on stabilizing commodity prices and renew their focus on core operations. Despite a dip earlier in the year, prices are expected to remain at current levels through the remainder of 2023. While we might not expect many major transactions, companies looking to invest excess cash flow may seek deals for complementary assets, such as basin consolidations, or pursue transactions that allow them to participate in new value chains such as liquified natural gas (LNG), carbon capture, utilization and storage (CCUS) or renewable energy.

Policy incentives like the Inflation Reduction Act still pose opportunities to expand portfolios in new directions, but activity remains slow potentially because the return on investment can be longer than other deals. Energy companies are concentrating on asset deals designed to enhance their existing core operations, especially those that allow them to lower expenses. During the first part of 2023, ongoing economic uncertainty and reduced access to capital has continued to suppress deal activity, which was lower both in volume and value. 

Explore national deals trends

Discovering a merger’s hidden value

While big, transformative deals may be less frequent in the energy sector in the current economic environment, those pursuing them have begun to crack the code on achieving value. As we found in PwC’s 2023 M&A Integration Survey, talent retention is one of several key factors in a merger’s success. This is especially important in the oil and gas sector, where retaining and recruiting talent as older workers retire can be challenging. With renewables and other cleaner energy programs gaining popularity, the industry faces competition attracting these new skills. 

Successful M&A organizations reported retaining key employees at more than twice the level of others surveyed. This wasn’t luck. Talent retention strategies included equity-based or cash retention payments and nonfinancial incentives. 

Learn more about leading practices and transformational mindsets in PwC’s new M&A integration report.

Key deal drivers

Capital allocation

The increased costs of debt, tighter credit conditions and cautious investor sentiment have contributed to a more challenging financing environment for transactions, leading companies to reassess deal-making strategies. If the return on investment isn’t significantly higher than the costs, companies can find it hard to justify the deal. This may continue to curb oil and gas deal volume, with the number of deals falling to 34 in the first five months of the year down from 59 in the second half of 2022. Meanwhile, values were relatively steady — $42.5 billion in the first five months of 2023 compared to $43 billion in the second half of 2022. Half of all energy deals were in oil and gas production, and most of the buyers were domestic.

Oilfield services (OFS) providers could be among the most affected by rising financing costs. These companies have been squeezed in recent years as producers slashed expenses. Profits have not recovered at the same pace as other sectors, making them more vulnerable to higher financing costs. Only two OFS transactions occurred in the first half of the year, down from five in the second half of 2022. Midstream companies may also be affected. Although one midstream megadeal of $18.6 billion was announced in May, other midstream deals during the first half of 2023 involved storage or smaller gathering systems and interconnects.  

Energy deal volume by sub-industry

Opportunity amidst uncertainty

Inflationary pressures, an evolving regulatory environment and uncertainty around future cash flows continue to affect deal activity across the sector. Despite higher stock prices, most companies are reluctant to use stock for deals, just as they are reluctant to do deals with borrowed money at current rates. 

Companies may hesitate on some deals because of the potential risks associated with changing input costs or shifting market dynamics. Larger transactions, in particular, can be difficult in this environment because doing a multi-billion dollar deal requires an expectation that commodity prices will stay strong and that the acquisition will continue to be accretive for a decade or more.

Through these pressures, opportunities do exist. Some companies see the current environment as an opportunity to divest non-core assets and strengthen balance sheets. Others see this as the time to pool resources to buy additional assets that serve strategic goals, such as  lowering break-even margins. Also, with uncertainty around the future regulatory environment, many are looking several years ahead and thinking through the investments they should make today to support a longer-term portfolio mix that includes more green energy assets. 

Necessity for business reinvention

Energy companies continue to seek ways to broaden their portfolio mix, with majors and large independents doing smaller deals or pursuing joint ventures in the areas of hydrogen, biofuels, carbon capture, sequestration and storage facilities as well as other renewable areas. They recognize the need to position themselves for the future should commodity prices drop or the demand mix for hydrocarbons shifts. Many of these current investments, however, may not bear fruit in the near term, leaving companies caught between focusing on the future or the here and now — or non-core versus the core. Oil and gas producers are renewing their concentration on the core business, seeking ways to enhance existing operations and lower expenses. PwC’s recent divestiture study found that making timely and objective divestiture decisions can help companies concentrate on their core business.  

Meanwhile, investors are generally pleased with the state of the industry due to stable commodity prices, focused investment in new drilling and lower break-even margins which are helping to drive increased equity values, rising dividends and higher yields. As a result, companies may stay the course on fossil fuels, even as they continue to look for long-term investments in cleaner energy.

While fewer big upstream transactions are expected this year, we do foresee some consolidation and asset transactions as companies make moves to strengthen their market positions. Producers may look for strategic deals that increase synergies and lower costs. In addition, given investors’ aversion to expanded drilling programs, companies could look for deals to gain access to new reserves, thereby replenishing their asset base without increasing exploration.

Divestitures create opportunities

As larger companies review asset portfolios and seek value through divestitures, smaller independents may find acquisition opportunities in the divested assets. For example, majors’ non-core assets, including offshore leases, could be an opportunity for independents looking to acquire properties that expand their holdings in lucrative production areas such as the Permian Basin and the Gulf of Mexico. Some of the larger independents and upstream producers may also divest midstream assets they might have held to use the funds in renewables and other core operations. We expect to see continued divestitures as companies refocus efforts on core assets. This may increase deal activity in the near term.

“To maintain fiscal discipline, companies continue to strengthen balance sheets and reward shareholders with dividends and share repurchases. Most deals have been asset transactions intended to monetize non-core assets for investments in core areas.”

— Seenu Akunuri, US Energy Deals Leader, PwC US
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