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Oil & gas deals insights: 2021 midyear outlook

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What's driving deals in 2021

PwC's Deals Sector Leader John Potter and other partners discuss the deals outlook for the rest of 2021.

Oil and gas deals stay strong as industry resets

Oil and gas posted 100 deals with a total deal value of $141 billion in the last twelve months (LTM). Deal counts were up 70% in the second half of LTM compared to the first half. However, deal values were down 51% due to the larger megadeals in the first half of the LTM. There were nine megadeals in the LTM representing two-thirds of the total deal value. Though upstream led in cumulative LTM deal value, the $21 billion 7-Eleven/Marathon downstream deal was the largest. Corporate deals totaled 58% of total deal value over the LTM as large consolidation deals drove values. Conversely, asset deals accounted for 54% of the deal volume as companies fine-tuned portfolios. Private equity investments continue to be limited, with only five in the LTM. While upstream and oilfield services (OFS) majors used both cash and stock to fund deals, midstream and downstream relied mostly on cash-funded transactions.

Oil and gas 2021 deals outlook

The oil and gas industry continues recalibrating in response to an array of shifting market drivers. Despite stabilizing supply and demand considerations as economies recover, companies remain focused on capital discipline and shareholder value. 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. The pace of consolidation is slowing, although still needed as players and assets outpace demand. A few more corporate deals are likely in 2021 along with asset plays in core basins like the Permian.

Energy transition momentum and environmental, social and governance (ESG) adoption will likely be significant drivers this year. We expect deals to increasingly target enabling technologies (e.g., digital, carbon capture, lower carbon technologies, etc.) and assets to diversify outside of core oil and gas operations while reducing carbon footprints across the sector. Investment focus will likely shift toward climate-focused domestic and global decarbonization targets which could accelerate opportunities across all oil and gas sectors for both corporates and financial buyers.

We see four deal components driving 2021 oil and gas M&A:

  • Nature of capital
  • Commitment to purpose and intent
  • Innovation and transformation
  • Geopolitical and regulatory shifts

Sub-sector outlook

E&Ps shift focus to assets as consolidation plays out

2021 deal activity has shifted notably toward assets as companies fine-tune portfolios. This trend will likely continue as fringe players sell off positions and exploration and production (E&P) in the Marcellus and Permian basins. Though the pace of consolidation is slowing, we still expect a few large deals in the second half similar to late May’s Cabot/Cimarex $7.4 billion basin diversification merger of equals.

Higher, stable oil and gas prices will likely limit M&A, as companies feel less urgency to make deals for the sake of survival and scale, with other priorities (e.g., dividends, capex, deleveraging) competing for capital. new energy and supporting technology deals could grow in 2021, as large E&Ps and integrated companies seek to mitigate carbon-risk exposure and improve operational performance and profitability.

OFS consolidation finally begins

Oilfield services corporate deals are accelerating as scale for survival prompted deals like Expro/Frank’s and Noble/Pacific Drilling in the first half. Balance sheet resiliency, deleveraging and free cash flow growth continue to dominate capital priorities as restrained E&Ps capex spending compress OFS margins and cash flow. For 2021, tuck-in asset deals are likely as companies rationalize portfolios and divest non-core assets.

Despite recent consolidations, overcapacity still persists in OFS. Until more players exit the market, there will be few compelling reasons to drive deals. However, bolt-on opportunities for technology acquisitions or digital capabilities could be attractive as companies look for ways to advance R&D and support ESG, electrification and energy transition to competitively differentiate versus peers.

Midstream asset deal momentum continues

Asset deals are poised to grow as commodity prices stabilize and the industry reassesses capacity in a lower oil production environment. Drop downs may pick up as companies look to optimize or consolidate gathering and processing volumes. Also, energy transition opportunities could arise as companies identify portfolio and capability gaps (e.g., renewables, hydrogen, carbon capture) and potential synergies with existing infrastructure.

Energy Transfer’s $6.9 billion acquisition of Enable in January marked the largest corporate deal since mid-2019 though a new consolidation wave is unlikely. Private equity exit strategies could prove challenging, though low valuations could prompt some financial buyers to seize infrastructure opportunities. 

Exports and retail driving downstream deals

KKR’s $3.7 billion stake in Sempra’s IEnova infrastructure business, along with New Fortress Energy’s $5 billion South America expansion deal for Hygo/GMLP, highlight returning interest in LNG infrastructure, storage and terminals as export demand grows. Refining asset divestitures remain difficult, though those facilities with coastal access will likely be better positioned to find buyers. HollyFrontier’s deal for Shell Puget Sound, WA refinery and Pemex’s unsolicited offer for Shell’s remaining stake in its Deer Park, TX, refinery are recent examples.

Retail deals remain active and are poised to accelerate as companies reacquire retail to hedge against price volatility. Large players also see retail synergies for energy transition and electrification opportunities as hubs for electric vehicle charging stations and distribution networks for renewable power generation.

“Synergy exploitation through consolidation has replaced inventory growth as the new mandate driving M&A activity in the current higher price environment.”

Seenu Akunuri, US Energy and Mining Valuation Leader, PwC

Key deal drivers

The shifting nature of capital

Debt markets remain constructive as low interest rates make capital attractive. However, banks and private equity face growing pressure to restrict oil and gas targeted lending, potentially limiting routes to capital. Companies may be hesitant to tap debt and credit markets for deals due to shareholder and market backlash if not aligned with shareholder value, ESG and energy transition priorities. Moody's noted that recent climate-focused actions against three supermajors could result in greater difficulty accessing capital while increasing capital costs across the sector.

Private equity (PE) capital may return to oil and gas, though at much lower levels, as opportunistic deals with low multiples in sectors like midstream could attract investment, though exit strategy woes may hamper PE enthusiasm. SPAC activity may also diminish as the current consolidation cycle comes to an end. 

Commitment to ESG, talent management, will be paramount

ESG goals will continue to drive capital, operational and strategic decisions this year and beyond. Oil and gas companies will need to assess how to best deploy capital, talent, and deliver shareholder value along with sustainable, profitable growth. Environmental activism will continue to raise the bar on ESG targets, accountability and disclosure.

Talent and human capital challenges will accelerate as markets and economies emerge from the downturn and demand returns. Oil and gas companies will need to right size and upskill their smaller core employee base to keep productivity high and operating costs in check. Leveraging digital and enabling technologies, supplemented with a robust bench of contract employees to fill operational, technical and deep asset knowledge gaps, can provide flexibility to respond to market volatility.

Massive technology investments signal innovation wave

Technology development is expected to accelerate both to support internal operations and for commercialization. Early-stage venturing, tech incubators and cross-sector partnerships for niche capabilities are likely to grow as oil and gas companies look to diversify their R&D capital spend and speed development times.

Innovation and technology opportunities aligned to energy transition and the broader transformation are expected to grow to meet aggressive greenhouse gas reduction and electrification targets. These are tied with once-in-a-generation infrastructure and enabling technology investment opportunities (e.g., batteries, storage, carbon capture, renewables, etc.) that will provide first mover advantage to those best positioned to deliver at scale.

Climate and regulatory policies could unlock opportunities

Policy and market shifts toward electrification will likely shift energy demand patterns from consumable-intensive industries like oil and gas, to infrastructure-heavy industries, primarily electricity transmission and distribution, raising stranded asset risks for legacy assets. Along with partnership and asset opportunities arising from the massive infrastructure investments needed to enable decarbonization goals, securing raw materials and assets (e.g., mining and metals) could drive deals in the near- to mid-term. Infrastructure project and permitting hurdles may be softened to accommodate needed expansion which could make midstream deals more attractive.

Geopolitical risks will continue to loom large over commodity price stability and subsequent investment within all oil and gas subsectors. 

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Mile Milisavljevic

Mile Milisavljevic

Energy Deals Leader, PwC US

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