January 2024

Executive viewpoint

Bruce On / Ernst & Young Strategy and Transaction

During the back half of 2023, the mergers and acquisition (M&A) market heated up considerably, with several high-profile, multi-billion-dollar deals involving large operators announced. Now, the question is whether this trend continues into 2024 and at what pace. To gain some insight around these M&A deals, World Oil visited recently with Bruce On, partner in Ernst & Young’s (EY) Strategy and Transactions practice.  

World Oil (WO): There were $388 billion in M&A transactions in the U.S., valued at $100 million and above, announced by U.S. energy companies. They supposedly drove more than a third (34%) of Q4 2023 total U.S. deal value. What was behind this wave of transactions?      

Bruce On (On): Energy companies and those outside the industry—venture capital, private equity, infrastructure funds, and other corporates—are capitalizing on favorable conditions to do deals and make investments. The energy industry saw deal value for large transactions of over $100 million surge 83%, compared to 2022, with a big push at the end of the year. The number of deals in Q4 was up 228%, compared to Q4 2022, according to EY analysis.  

The oil and gas sector has been a standout, with multiple blockbuster deals announced to close 2023 and as we start 2024. These announced deals support the overarching trend we’ve been anticipating in oil and gas: more consolidation. Record profitability has helped fund many of these deals, driven by a surge in post-pandemic demand, geopolitical tension affecting supplies, and improved structural performance in the businesses.  

The consolidation wave results from companies focusing on securing additional current and future production and driving better profitability through synergies achieved by eliminating redundant costs and optimizing operations. We see many deals contemplating significant margin gains through optimization in areas, such as supply chain and procurement, field development and drilling, and ESG.  

WO: Do you see this trend continuing during 2024? 

On: Yes. In fact, we named energy as our M&A Sector to Watch in 2024, because we anticipate continued deal activity, as the energy system evolves toward lower-carbon and renewable energies. For the oil and gas sector outlook specifically, more transformative deals are expected. The realization for many about the role of oil and gas in energy transition, as well as strong cash flow, has emboldened companies to strengthen their portfolios, as the sector maintains its relevance for decades to come. The cost structure gains through these mergers will enable oil and gas companies to be even more resilient to commodity price swings. 

WO: Would it be fair to say that part of this consolidation trend is coming from integrated oil companies and large E&P operators looking to secure acreage, enhance their cash flow and maximize returns via acquisition, rather than traditional exploration?  

On: Yes. We see upstream operators positioning themselves as the best stewards of the assets to drive performance across operations and optimize capital and carbon management. Large E&Ps are also looking to increase production through acquisition and create the lowest cost profile ​​to support margin growth and margin capture from ongoing operations, while topics around supply chain procurement, technology, and deployment are also top of mind.  

WO: What do you think are some of the factors that CEOs of large E&P companies are considering as they identify targets to acquire? 

On: Companies are executing transactions to meet strategic rationales in both traditional and low-carbon businesses. Identifying a target, completing the due diligence and announcing the deal is only the beginning of the hard work. Mergers of the size that we are seeing include hundreds of functions, hundreds to thousands of employees, millions of customers and billions of data points. 

The deal focus usually starts with a focus on the business’ assets. What is the quality of the reserves and what is the cost profile of operations? Geological and reserve analysis confirms the attractiveness of assets. CEOs and their teams will focus on whether the assets and future production fit their companies’ strategies and fit within their portfolios. 

There is significant value to be gained in the process of combining two companies, and CEOs have high-synergy aspirations. For example, recent deals have focused on cost savings through operational synergies, such as supply chain and procurement and merging of asset development design to maximize production output. These require additional and more detailed due diligence, as valuing assets can be a complex task, due to the volatility of energy markets and a host of unpredictable factors, including changes in commodity prices, swings in supply and demand, and technological innovations. 

Mergers and acquisitions in the energy industry are often scrutinized for their environmental impact, so alignment to decarbonization goals and the company’s growth strategy will be critical considerations, as well. For example, we’re seeing companies outline how the deal will advance or accelerate their low-carbon goals.  

Other major considerations will be around integration of systems and processes, including technologies across both organizations, most notably the systems that support the ongoing operations and production. 

WO: Is there any hesitancy, at all, on the part of E&P CEOs to do these M&A deals, especially the large, multi-billion dollar transactions, if they are subject to tighter scrutiny under the FTC and DOJ finalized merger guidelines, particularly since you have an Administration that is not friendly to oil and gas? 

On: Navigating the antitrust environment brings challenges that necessitate strategic and agile approaches to target identification, acquisition and risk management. Oil and gas companies seeking to execute these large acquisitions understand that their efforts will raise scrutiny, and it is a key consideration for management teams in identifying targets and mitigating deal risk.  

However, M&A is inevitable in the oil and gas sector, as it presents growth opportunities and natural synergies. CEOs who adjust their strategies to brace for additional regulatory scrutiny will emerge in better positions to continue their organizational transformation journeys in the future. 

WO: How closely tied are these M&A deals to the price oil and/or natural gas?  If commodity prices were averaging higher, would we see as many of these deals? 

On: The absolute price level is less important for allowing these deals to continue, as is an expectation of predictability of future prices. If companies have greater confidence in the underlying fundamentals affecting price, they have greater confidence in the commercial analysis around the combination. On the reverse, if prices go higher, the prices expected from sellers could challenge the viability of longer-term returns from the deal. It is all about confidence that commodity prices will be supportive of long-term profitability from these assets. 

We are also seeing mergers and stock deals, which allow the parties to manage the price trends, as that is usually already factored into each companies’ stock price.  

WO: At what point do you think the industry will have consolidated enough, and operators will be forced to drill more again? 

On: There is not a zero-sum game between inorganic and organic growth. In fact, one of the drivers of several of these combinations is that consolidated operations will allow operators to produce higher levels for longer than the two individual operators could. In some cases, this stems from different approaches to reservoir management, or the benefits of scale across a wider portion of a specific play. There is also a question of critical infrastructure investments that are easier to make for combined assets that might not be done – or with significant delays – if investment required the approval of multiple firms.  

WO: If we continue to see this M&A consolidation among the E&P operators, do you think we will eventually see a similar consolidation among the equipment and service sector? How about for drilling contractors, both onshore and offshore? 

On: The same strategic rationale supporting the consolidation of E&P operators could be applied to the OFS companies. We expect to see deals in the OFS sector, as companies look for ways to transform their cost structure and optimize their operations. Drilling contractors may find transactions a compelling course of action. However, there may be additional scrutiny by regulators if the consolidation results in high concentrations by market players. 

About the Authors
Bruce On
Ernst & Young Strategy and Transaction
Bruce On is a partner in the EY Strategy and Transactions practice, focused on the oil and gas sector and energy transition market. He has more than 20 years of experience working with both private equity and corporate clients across their deal and strategy agendas. Bruce has extensive experience in sell-side transactions, complex carve outs, bolt-on acquisitions, and cross-border transactions.
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