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Energy: US Deals 2024 outlook
Oil and gas deal activity accelerates
A period of acquire or be acquired is here for the upstream oil and gas market. Public companies are acquiring other public companies or private producers or engaging in mergers of equals. As deal value has increased over the past 12 months, companies have retained the fiscal discipline demanded by investors in recent years. As a result, capital spending on new drilling remains low. Instead, companies are looking to acquire properties that are ready to produce in a move to build inventories into the next decade.
Two global megadeals stand out: ExxonMobil’s pending $60 billion purchase of Pioneer Natural Resources and Chevron’s pending $53 billion acquisition of Hess. (The total for these two dwarfs the $70 billion total for other recent transactions in the sector.) As larger producers have been forced to leave Russia, they are looking for deals that can boost reserves in other parts of the world. That makes properties in the Western Hemisphere, whether the Permian Basin (home to the most prolific US producers) or Guyana (home to one of the largest recent oil discoveries) attractive — either through acquisitions or joint ventures.
Key deal drivers
Resilience for growth: Stable commodity prices underpin deals
Strong commodity prices have encouraged consolidation. Crude oil has traded between $65 and $90 a barrel for most of 2023 and is predicted to stay in that range or move slightly higher over the next year. Ongoing conflicts in the Middle East and Ukraine, combined with improving demand and extension of production cuts by OPEC+, will continue to support prices.
Most producers have break-even points that will allow them to make money even if oil prices drop to $55 or $60 a barrel. The more stable outlook for commodity prices bodes well for companies’ cash flow, which means deal activity will likely continue apace.
Capital allocation: Companies have financing flexibility
Strong balance sheets are fueling the consolidation trend. And strong commodity prices have helped shore up company finances, enabling them to pay off debt, repurchase shares and increase dividends and distributions to investors. That has given them financial flexibility to do deals, despite higher interest rates. Buyers can take advantage of robust stock prices or do cash deals because of the positive cash flow they’re generating.
At the same time, companies are being more disciplined in their approach to deals than they were a few years ago. Five years ago, the emphasis was on drilling as much available acreage as possible while prices remained high. Today, companies are being more judicious in how they invest. The industry is remaining disciplined, making careful decisions based on assessments of assets’ longevity.
Debt remains costly for smaller players, but many are looking at smaller deals and finding bank financing readily available, again due to strong commodity prices. For example, one regional player used a combination of cash, stock and debt to deploy more than $2 billion in recent deals to enter the Permian Basin.
In addition, some smaller companies are looking for synergies that, once a deal is done, might make the combined company a target for larger buyers. In the midstream sector, deals are likely to come as assets are sold to complete large upstream consolidation. Some pipeline operators are looking for assets that can help them rebalance their portfolios or increase their export capabilities.
Renewables lose some luster
Even as major oil producers continue to focus on environmental, social and governance strategies, there are signs of these efforts taking more of a back seat across the wider industry. Some may be betting that energy transition is farther off than it once seemed.
Private equity firms are recognizing that oil and gas investments are generating short-term returns that outshine the long lead time for renewables. Even firms that are raising funds for the energy transition are simultaneously exploring deals in traditional oil and gas that still meet their overall mandates. Given the cash flows being generated in the upstream sector, some private equity players who placed big bets on the “green revolution” a few years ago are looking for opportunities within oil and gas.
Car manufacturers are scaling back production of electric vehicles and the price for renewable power has crept up during the past year. Demand for fossil fuel is unlikely to slow significantly in 2024, and, barring a recession or other macroeconomic event, may even increase.
In addition, the renewables industry may continue to struggle with supply chain issues, from components such as solar panels to the availability of rare earth minerals for battery manufacturing. That may further delay returns and ensure gasoline-powered cars will remain in demand for the foreseeable future.
Opportunity amidst uncertainty: Increases in LNG demand
Russia’s invasion of Ukraine, which left European countries looking for new supplies of natural gas, may continue to drive consolidation in the US as companies build more liquefied natural gas (LNG) export terminals. Most of the deal activity is among smaller, private companies that are looking to supply those facilities, both with production and pipelines.
LNG export volume is expected to increase by 10 percent in 20241 as two new export projects come online — and more capacity is on the way. North American export capacity is expected to expand by 113%, reaching 24.3 billion cubic feet per day by late 2027, according to the U.S. Energy Information Administration. As many as 10 new projects are planned in the U.S., Canada and Mexico. The additional capacity, combined with increased global demand for LNG and abundant US gas supplies, is likely to continue to drive deal activity in the sector.
1. Source: U.S. Energy Information Administration (July 2023)
“There is renewed optimism in the oil and gas industry as deal activity has picked up in the last 12 months. It is evident that companies are thinking about the next decade of inventory given foreseeable demand, with small to megadeals acquiring properties that can produce with low cost and little effort.”
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