The Next Wave of Consolidation: Navigating M&A and Strategic Divestitures in U.S. Oil and Gas

JULY 2024 – The Oil and Gas (O&G) industry, particularly in the United States, is currently witnessing a historic merger and acquisition (M&A) frenzy. In the first quarter of 2024, the sector recorded 251 deals globally with a disclosed value of USD 101 billion, despite a global 7% decrease in the number of announced deals and a 48% reduction in total disclosed value compared to the previous quarter (1). This indicates a significant consolidation phase, particularly influenced by 16 megadeals which constituted 86% of the global disclosed value. The US O&G industry stood out as the oil and gas deals hit a record $51 billion in the first quarter, a continuation of last year's fierce merger pace concentrated in the top U.S. shale field (2). 

The Next Wave of Consolidation

The current wave of consolidation in the oil and gas industry is primarily driven by the necessity for increased scale and efficiency amid fluctuating oil prices and stringent regulatory changes. While the current pace and volume of M&A transactions have seen a slight decline from the high levels of activity observed in late 2023, the sector is experiencing a notable period of strategic consolidations. This trend echoes past cycles, such as the significant Shell-BG Group merger in 2016, which catalyzed prolonged M&A endeavors that lasted until mid-2019, with a resurgence from late 2020 through early 2022. These strategic mergers and acquisitions are critical as they enable operators to enhance operational efficiencies and optimize expenditures, ensuring competitiveness in a challenging market.

The strategic focus of this consolidation wave is evident in the upstream, midstream, and downstream sectors:

• Upstream: The upstream sector saw a 5% drop in the number of deals (169 deals in Q4 of 2023 to 160 deals in Q1 of 2024), coupled with a significant 63% decrease in disclosed values.
• Midstream: Conversely, the midstream sector experienced a 3% increase in deal announcements and a notable 63% rise in disclosed value, suggesting a strategic pivot towards enhancing infrastructure capabilities.
• Downstream: Although the downstream sector observed a 16% reduction in the number of deals, the disclosed values surged by 83%, indicating targeted investments in high-value areas.

Strategic Divestitures Post-Consolidation

Following the recent wave of consolidation, key industry players are anticipated to engage in strategic divestitures aimed at refining their asset portfolios and enhancing financial performance. The primary goal of these divestitures is debt reduction, with companies looking to offload non-core assets to decrease debt levels and improve financial agility. Proceeds from these sales are typically reinvested into more profitable ventures, further optimizing financial health and strategic focus.
Leading oil and gas companies are actively implementing strategic divestiture and investment reallocation plans:

• BP: Aims to generate $2 billion to $3 billion from divestitures in 2024, with a broader goal of $25 billion between the second half of 2020 and 2025. This strategic shedding of non-core assets is aligned with its investment in sustainable energy projects (3).
• Occidental Petroleum: Following its acquisition of CrownRock, Occidental plans to generate between $4.5 billion and $6 billion through a divestiture program within 18 months to maintain its investment-grade credit ratings3.
• Chevron: Following its acquisition of Hess, Chevron is looking to escalate asset sales with the goal of generating $10bn to $15bn in proceeds by 2028. Additionally, proceeds from these divestments are typically reallocated towards more profitable investments in areas promising higher returns, like the Permian Basin and offshore Guyana, a strategy prominently pursued by ExxonMobil (4).

Opportunities for Small and Mid-Caps in a Consolidating Market

As large companies consolidate and streamline their portfolios, small to mid-cap companies find significant growth opportunities through strategic acquisitions of non-core assets. These entities should not only sharpen their market vigilance and maintain financial readiness to swiftly capitalize on these openings, but also invest time in evaluating their core asset base. Understanding the value that various assets bring based on company strategy and how changes to that asset base may benefit the company is crucial. Acquiring additional assets to scale in existing areas may bring operational synergies, enhancing their competitive edge in a market driven by scale and efficiency.

As the US oil and gas sector continues to navigate a transformative era marked by a record-setting pace of mergers and acquisitions, the focus shifts strategically across the upstream, midstream, and downstream sectors. This historic consolidation is not merely about scaling operations and improving efficiencies but is deeply intertwined with strategic divestitures and investments that prepare companies for a more sustainable and financially robust future. By offloading non-core assets and reinvesting in high-value projects, industry giants like BP, Occidental, and Chevron are not just adapting to current market dynamics but are actively shaping the future of energy. These market shifts create opportunities for small and middle-market operators as they re-evaluate their core assets. As we move forward, the ability of these companies to balance aggressive M&A strategies with smart divestitures will likely dictate their success in an increasingly competitive and regulation-driven global market.

Join us for the North American Energy Capital Assembly on October 16th, where an esteemed panel including Danny Brown, President & CEO of Chord Energy, Matt Parsons, Principal at Sixth Street, and Arathi Chandran, Partner at Boston Consulting Group, will explore the ongoing transformation of the Oil & Gas industry. This discussion, titled “Redefining the O&G Industry Amidst a Record-Breaking M&A Spree: The Drive for Consolidation to Enhance Scale & Efficiency in the US Oil Sector,” will delve into the strategic imperatives driving unprecedented mergers and acquisitions, focusing on scaling operations and boosting efficiency across the sector.

References

1. Kroll, 2024. Global oil and gas M&A outlook Q1 2024. Available at: https://www.kroll.com/en/insights/publications/valuation/global-oil-and-gas-m-and-a-outlook-q1-2024 [Accessed 7 July 2024].
2. Reuters, 2024. U.S. oil & gas M&A hits quarterly record after blockbuster 2023. Available at: https://www.reuters.com/markets/deals/us-oil-gas-ma-hits-quarterly-record-after-blockbuster-2023-2024-04-23/#:~:text=HOUSTON%2C%20April%2023%20(Reuters),provider%20Enverus%20said%20on%20Tuesday. [Accessed 7 July 2024].
3. Yahoo Finance, 2024. Strategic asset divestitures: 3 energy giants to watch. Available at: https://finance.yahoo.com/news/strategic-asset-divestitures-3-energy-133100900.html [Accessed 7 July 2024].
4. PwC, 2024. Energy, utilities, and resources deal trends. Available at: https://www.pwc.com/gx/en/services/deals/trends/energy-utilities-resources.html [Accessed 7 July 2024].