Oil and gas deal activity will likely accelerate in the second half of 2022 as buyers gain confidence that high commodity prices will persist. Investors who turned away from the industry in recent years are reassessing their strategies.
Higher prices may curtail corporate deals as companies retain assets. However, private players looking to capitalize on higher prices may boost production with acquisitions as internal drilling programs are hampered by a lack of materials and labor shortages.
Concerns about the US economic outlook and geopolitical unrest slowed deal activity in the first half of 2022. However, year-over-year deal activity remained strong, with a reported 123 deals valued at $107 billion during the last 12 months (LTM) ending on May 15, 2022. This is up from the 98 deals during the previous LTM, a period which had a similar total deal value. Upstream deals accounted for most of the transactions so far this year — a trend that will likely continue in the second half of the year if the Colgate Energy Partners megadeal is any indication. That deal, valued at a reported $508 million, closed just days after the period analyzed for this midyear report.
Investors’ emphasis on renewable energy has been muted by higher commodity prices, resulting in stronger returns among traditional oil and gas producers. West Texas Intermediate crude, the US benchmark, increased more than 60% this year, and natural gas prices have more than doubled. Some companies have responded to the higher prices by holding on to properties they might otherwise have sold. However, the prospect that the elevated prices will continue, amid sanctions against Russia for its invasion of Ukraine, is triggering renewed interest in traditional oil and gas production.
In the competition for capital, oil and gas has performed well year-to-date. The Standard & Poor’s Exploration and Production Index has increased 76% this year, compared with a 49% decline for the Nasdaq. As a result, many institutional investors are rethinking their strategies. While public companies have continued to focus on shareholder returns and resisted the urge to significantly expand drilling programs, private companies are deploying capital more rapidly.
Demand for natural gas — and, more specifically, liquified natural gas (LNG) — will likely rise as US LNG suppliers step up shipments to Europe to offset the loss of Russian gas. Suppliers may attract increased capital corresponding with more long-term contracts from Europe and Asia as those regions look to secure supplies.
“Private equity deals are on pace for another record year as traditional oil and gas investments become attractive once again. At the same time, investments in renewables, carbon capture and storage as well as other ‘green’ assets continue to grow. ”
Energy, Utilities and Resources Deals, Principal, PwC US