The main deal activity in the oil and gas industry in 2019 revolved around the need to improve company finances and reduce debt. Major multinational oil and gas companies – including ExxonMobil, ConocoPhillips and Chevron – sold off non-profitable ventures.
Investors no longer want to support drilling programs and expansions. They want to see cost reductions, internal efficiencies and increased returns. One of the best ways to do this is through consolidation.
These pressures come among a backdrop of prolonged low oil prices, weakening economic growth, increasing trade tensions and political risks – particularly the US election cycle and the fallout from the Brexit decision in Europe.
All these factors will have a big effect on deal activity in 2020 – and will drive more mergers and acquisitions. We can expect to see major oil companies continue their retreat to core territories and to sell off their non-core assets. They will also increasingly look to technology and digitalisation to bring about efficiencies.
Ravindra Puranik, Oil & Gas Analyst at GlobalData, said: “Recently, oil and gas companies have focused on prioritizing their areas of operations more on markets closer to their traditional bases. Hence, we are likely to see the UK or European operators acquiring assets in the North Sea, or the US-based companies and oil majors targeting independent shale drillers.”
Smaller companies are under increasing pressure to sell, particularly those who have substantial debt. It is extremely unlikely we will see a return to the optimism of 2011 to mid-2014. But there wil not be the negativity we saw during the price crash years from mid-2014 to 2017.
A big deal driver in 2020 will be the urgent need for energy transition. Hydrocarbon-focussed companies need to acquire renewable energy skills, expertise and technology – under pressure from environmental concerns and stricter regulation. A recent example of this trend was the sale of offshore wind specialist 3 Sun to global energy company Worley.
Puranik added: “Oil and gas giant BP announced to sell its entire business in Alaska to Hilcorp Energy for a total consideration of US$5.6bn. The deal included sale of BP’s upstream portfolio of Prudhoe Bay oil fields in the Alaska North Slope and associated midstream assets in the region. This divestment is likely to help BP in reducing its net methane emissions from global operations.”
Energy transition deals will be affected by two big events in 2020. Firstly, there is the UN COP 26 conference, when the signatories to the Paris Agreement will be asked to upgrade their emission reduction targets. The other major event will be the US presidential election.
It is possible that a major European firm could look to scale up its renewable operations with a major acquisition – but we are more likely to see a series of smaller acquisitions.
The buyers in many locations will be local – using increasingly innovative finance deals. Many people predict that bonds will become used more and more as a means of finance as traditional banks and lenders tighten up.