Energy security and sustainability rise to the top as the $6.5 trillion industry pivots to focus on long-term resilience

HOUSTON , Feb. 22, 2023 /PRNewswire/ -- Key takeaways:

Deloitte's new report "Oil and Gas M&A Outlook 2023: Pivoting for Change" examines the shift in the industry and the strategic pivots that are expected to shape the future. The report, which analyzes M&A activity over the last 5-10 years, finds that:

• Macroeconomic uncertainty, geopolitical events, pressures to accelerate the energy transition, concerns over energy security, and increased energy price volatility have triggered a change in the strategy of many oil and gas (O&G) companies .
• Ongoing shifts in the O&G market are causing many companies to refocus their long-term investments, with a growing emphasis on the clean energy transition and energy security.
• Oil prices are no longer a deal enabler , implying that the O&G industry is pivoting out of traditional M&A, which fell by 35% in 2022.
• Hydrocarbon M&A activity fell to its lowest level since 2008.
• Free cash flows are now prioritized for paying dividends, buying back stocks, and investing in new low-carbon solutions . Yearly hydrocarbon mergers and acquisitions (M&A) by O&G companies peaked at about 10% in 2014, and in 2022 it constituted only 3% of the industry's market capitalization
• Clean energy M&A reached a record 15% of the total deal value by O&G firms, and one-third (31%) of joint ventures are now in the clean energy space. Further, 82% of upstream and midstream deals were for natural-gas-based assets in 2022. An increased emphasis on the energy transition drove $32 billion of clean energy M&A by O&G companies in 2022.
• Rising energy security concerns are driving increased acquisitions of natural gas and LNG assets aimed at securing the energy supply chain.

The report is based on Deloitte analysis of M&A activity datasets such as Enverus's global M&A database, Refinitiv Eikon for company financials and ESG performance of buyers and sellers, and S&P Capital IQ for global clean energy. For more information and detailed sources, please visit: https://www2.deloitte.com/us/ogmaoutlook23

O&G companies pivoting out of traditional M&A

A $6.5 trillion industry by market capitalization, the global O&G industry has grown by about 50% since 2014. However, as a proportion of the industry's size, O&G M&A activity fell to an 18-year low of less than 3% in 2022—comparable to the pre-shale era.

• Hydrocarbon M&A by O&G companies fell by 35% in 2022, despite a sharp rise in energy prices and record cash flows.
• O&G companies have changed their debt-laden growth mindset of 2010-2014. Only about 7% of O&G deals by value were funded through debt in 2022. With little leveraged buying, the impact of the ongoing interest rate hikes is expected to be minimal on the industry in 2023.
• Oil prices are no longer a deal enabler amid ongoing capital discipline and a shareholder-focused strategy: O&G companies paid dividends and initiated stock buybacks of $500 billion in 2022, three times that of M&A activity.
• The O&G M&A playbook is changing with many buyers now focusing on ESG-friendly hydrocarbon companies, clean energy and natural gas assets, and supply chain security.
• Clean energy M&A by O&G companies constituted 15% of their total M&A and 13% of global clean energy M&A (across all industries) in 2022, with a growing focus on biofuels and hydrogen assets.

Sector consolidation increasingly focuses on securing supply chains

With growing risks to energy security amid highly uncertain energy prices, companies across the O&G sector are increasingly focused on securing supply chains and buying consumer-facing assets.

• Upstream buyers tend to prioritize producing assets for cash flows and strengthening their position in the natural gas supply chain. Additionally, investor interest is rising for midstream storage and gathering and processing assets, accounting for 56% of overall deal value in 2022.
• Downstream buyers appear to be shifting from acquiring traditional refinery assets (cracking units, etc.) toward customer-facing assets (service stations and lubricants), which accounted for 46% of the overall deal value.
• Oilfield service companies are coming together to develop solutions that are designed to help customers reduce their carbon footprint.

Five new drivers for deals emerge

In the changing world of energy, new drivers are creating a shift in how and where many O&G companies invest and acquire assets and companies, including:

• Operating excellence – U.S. shale dominates most upstream M&A activity, with the Permian Basin accounting for the largest share in 2022 (28%), as players aimed to improve efficiencies.
• Energy security – In 2022, 82% of global midstream deals were for natural gas-based assets, as O&G companies were focused on securing supply chains.
• Energy transition – The rising focus on an accelerated energy transition helped spur $32 billion of clean energy M&A activity, or 15% of total M&A, by O&G companies in 2022, the highest ever recorded.
• Governance and compliance – Buyers are increasingly looking for sellers with a higher ESG profile. Over the past five years, in more than 70% of deals, the ESG score of the seller was higher than that of the buyer.
• Partnerships and strategic alliances – About one-third (31%) of joint ventures (JVs) and strategic alliances by O&G companies are now in the clean energy space, with the highest number of clean energy JVs in broader renewables (21%), hydrogen (19%) and biofuels (17%).

Charting a future based on resilience and a new core
According to the study, O&G companies should embrace change by building resilience and creating a new core. The study also notes that certain external factors may limit M &A activity, including the macroeconomic and capital market environment, as economists weigh the impact of a recession or slowdown, geopolitics, and the demand for hydrocarbons. However, while strong financials and regulatory support may support M &A, price volatility is likely to keep activity stable.

Key quotes
"The industry is beginning 2023 with some of the strongest balance sheets we've seen in recent years. Record high free cash flows led to healthy balance sheets in 2022 and enabled oil and gas companies to decrease debt-funded M&A to just 7% of total M&A, its lowest level in more than a decade."

— Amy Chronis , vice chair, U.S. oil, gas and chemicals leader, Deloitte LLP

"The M&A playbook has changed. Oil prices are no longer a major driver of M&A activity. Instead, the industry is striking a balance between energy security and sustainability. Many oil and gas companies are positioning themselves for long-term growth by turning to clean energy and partnerships with strategic investments."

— Melinda Yee , partner, oil and gas transactions and M&A leader, Deloitte & Touche LLP

Connect with us on Twitter at @Deloitte4Energy or on LinkedIn at @AmyChronis and @MelindaYee .

Report methodology

Deloitte's 2023 O&G M&A Outlook leverages several market sources including:

• Enverus's global M&A database, updated on Jan. 6, 2023 . The data includes all reported upstream, oilfield services (OFS), midstream and downstream transactions valued at more than $10 million , excluding those between related parties and government lease sales and licensing.
• Refinitiv Eikon for company financials and ESG performance of buyers and sellers.
• S&P Capital IQ for global clean energy M&A, joint ventures and company financials.

About Deloitte
Deloitte provides industry-leading audit, consulting, tax and advisory services to many of the world's most admired brands, including nearly 90% of the Fortune 500® and more than 7,000 private companies. Our people come together for the greater good and work across the industry sectors that drive and shape today's marketplace — delivering measurable and lasting results that help reinforce public trust in our capital markets, inspire clients to see challenges as opportunities to transform and thrive, and help lead the way toward a stronger economy and a healthier society. Deloitte is proud to be part of the largest global professional services network serving our clients in the markets that are most important to them. Building on more than 175 years of service, our network of member firms spans more than 150 countries and territories. Learn how Deloitte's approximately 415,000 people worldwide connect for impact at www.deloitte.com .

Contact

Alyssa Weir
Public Relations
Deloitte Services LP
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alweir@deloitte.com

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