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Oil & gas deals insights: 2021 outlook

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Oil and gas 2021 deals outlook improving as the industry recovers

Over the last twelve months (LTM) there were 82 oil and gas deals totaling $122.9 billion, down 41% year-over-year with 80% of deal value occurring in 2H, and led by mega deals in upstream and downstream. Corporate and asset deals were roughly equal based on deal value. Upstream majors deployed both stock and cash for deals, while other sub-sectors relied on cash instead.

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Challenges and opportunities for deals in 2021

PwC's Deals Sector Leader John Potter discusses the trends driving deals and outlook for 2021.

PwC's Deals Sector Leader John Potter discusses the trends driving deals and outlook for 2021.  Explore national deals trends.

Oil and gas deals outlook

The oil and gas industry is recalibrating in response to an array of shifting market drivers. The prolonged decline in demand for both oil and gas production and refined products due to Covid-19 will likely continue to keep capital discipline front-and-center. This could present headwinds for deals opportunities for many companies, as other competing calls for cash will require deals to demonstrate strong prospects to deliver accretive returns more quickly than other capital investment alternatives. However, announced deals in October indicate that opportunity exists for well-capitalized E&P players to acquire quality assets, build on existing drilling inventory, and unlock corporate synergies.

We see four deal drivers which will drive 2021 energy M&A:

  1. Shifting industry paths
  2. Opportunities in innovation
  3. Future of capital
  4. Policy impact on deals 

Sub-sector outlook

E&P’s reprioritize due to lower hydrocarbons demand through consolidation and asset high-grading.

1H upstream deals stalled as balance sheet resiliency and cash flow needs became paramount in response to the downturn. As prices stabilized in early Q3, deal activity -- largely driven by oil-focused, stock-funded, shale consolidation mega-deals -- rebounded; 85% of total LTM deal value ($47 billion) comprised seven consolidation deals announced in 2H20.

Upstream consolidation is expected to continue, along with oil-focused deals. However, with domestic and global natural gas demand improving, gas-targeted assets and strategic deals are also likely set to grow. Major and supermajor portfolio recalibration towards net zero carbon goals could reprioritize portfolio assets, leading to possible divestments of underperforming onshore and offshore hydrocarbon assets along with technology and new energy buys. 

OFS overcapacity and lower E&P customer spend will likely limit deal activity.

OFS deals remain scarce as large service companies scale back North America operations. The Apergy/Nalco deal in December 2019 was the largest LTM deal, accounting for 73% of OFS total deal value. Since March, only one deal was announced: Liberty’s acquisition of Schlumberger’s North America onshore hydraulic fracturing business.

OFS companies will likely continue to deploy cash to stabilize balance sheets and improve cash flow as challenging market conditions persist, which could reduce available capital (and appetite) for M&A. OFS capacity is still heavily oversupplied. Until that overcapacity exits the market, there will be few compelling reasons to drive deals aside from bolt-ons to acquire technology or digital capabilities, in lieu of deploying capital for research and development.

Needed infrastructure and storage capacity will likely continue to drive midstream deals.

Midstream announced 24 deals over the LTM, 70% were asset deals, of which Berkshire Hathaway’s acquisition of Dominion’s midstream assets was the largest at $9.7 billion. Corporate deals targeted subsidiary mergers as companies simplify business structures (Equitrans, CNX Resources).

Interest in infrastructure-related asset deals is expected to continue, especially for transmission, storage, and LNG-targeted applications and exports. Growing demand for storage and liquefaction capacity for petrochemicals and LNG exports could drive additional asset deals and private equity investment as well. Utilities, upstream, and downstream companies with midstream assets may look to divest to generate cash and simplify operations.

More refining divestments are expected, though buyers could be scarce; retail deals are likely.

Retail deals (7-Eleven/Marathon Speedway, Casey’s/Buchanan Bucky’s) accounted for 75% of LTM downstream deal value. Refiners -- both integrated and independents -- made divestments in order to unload underutilized assets; however, buyer interest has grown lackluster.

Refiners will continue to face an uphill battle for profitability if lower product demand and prices continue into 2021, which could increase urgency to divest assets to replenish capital. Downstream companies with retail assets will likely continue to find deal opportunities as convenience stores have been one of the winners during the pandemic. Additionally, companies that provide logistics and supply services to large industrial segments (e.g., gas, lubricants, etc.) may be attractive targets for private equity investors.

“Energy space will see divergent M&A trends in the upcoming period: continued consolidation in US onshore, divestitures in downstream and repositioning in midstream.”

Mile Milisavljevic, US Oil & Gas Deals Leader

Key deal drivers

Capital priorities, overcapacity, and profitability concerns will likely drive 2021 deal decisions.

Industry overcapacity signals a drive toward divestitures, carve-outs, and asset sales. However, as oil and gas companies shift to an outlook of sustainably, lower hydrocarbon demand and rebalancing of strategic and operational priorities, the bar for both retaining parts of the portfolio as well as engaging in M&A could simultaneously increase. Upstream consolidation is trending upward as the gap between large (and well capitalized) and small companies widens. Deal opportunities should arise as companies prioritize certain assets in their portfolios and decide to buy rather than build (R&D & reserves) to gain technology capabilities, scale and operational efficiencies.

Oil and gas companies will likely grow digital and technology capabilities via deals.

New ways of working will likely continue to drive investments both in-sector and cross-sector deal opportunities, particularly those that provide digital and remote solutions and operational efficiencies. Also, as the energy transition to lower carbon solutions accelerates, technology investment and deals will likely be made to support the growth in renewable energy demand, electrification, and infrastructure capacity. Companies will also likely look to deals to deliver technologies to monitor and mitigate emissions, in lieu of in-house R&D investments and to preserve liquidity.

Deals that support sustainable, profitable growth are most likely to move forward.

Companies able to mitigate risk in their business models with compelling, sustainable strategies for profitable growth — both organically and inorganically — will be best positioned to attract capital. The shift to more capital-light business models could also further drive demand for cross-sector transactions to support needed technology and digital capabilities as the sector pivots to lower carbon. The industry winners will likely be those able to reposition their value proposition to shareholders and access lower cost capital from multiple sources. 

Lower-carbon energy policy could drive hydrocarbon divestments and enabling technology opportunities.

Uncertainty persists across the oil and gas sector, and policy changes under a new US administration’s focus on energy transition could motivate further shifts in deals toward divestments of hydrocarbon assets and infrastructure build-outs to support renewables (including hydrogen), though finding buyers may prove challenging. Policy changes could also spur portfolio additions for digital and technologies that lower carbon emissions and improve operational efficiencies across the sector.  

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Mile Milisavljevic

Mile Milisavljevic

Energy Deals Leader, PwC US

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