The next significant phase in upstream oil and gas M&A is well underway as companies look to secure and enhance growth platforms for the next 10 to 20 years. The wave is likely to continue and comes amid mounting industry pressures, including financing challenges, escalating costs, and disruption caused by the energy transition. 

AlixPartners’ analysis suggests that this new consolidation wave may be a prolonged and potentially transformational trend. The U.S. onshore shale era is maturing, and operators are faced with a depleting inventory of high-quality drilling locations. This will spark additional consolidation, with deals following different formulas but a similar goal of securing a profitable future in an ever-evolving landscape of energy opportunities and challenges. 

As with most M&A, success isn’t a given. Our research on prior upstream oil and gas M&A transactions indicates that combinations turn out to be accretive to shareholder value only about 50% of the time. As climate concerns escalate entirely new merger execution risks threaten to create more losers than winners.

Still, there is ample potential to create substantive synergy value over the near-term. 

A history of deal-making

Upstream oil and gas is fertile ground for consistent deal-making. Companies are continuously looking to high-grade their acreage portfolios, or to execute spot acquisitions or divestitures. Every decade or so, however, there is a larger M&A surge. 

The late 1990s and early 2000s were marked by larger international majors starting to consolidate, a trend sparked by BP’s acquisition of Amoco. That was followed by their union with Atlantic Richfield (ARCO). Exxon merged with Mobil, and then less than a year later, Chevron merged with Texaco. Conoco merged with Phillips shortly thereafter.

These early combinations were driven by companies scaling up to access the opening international and deep water oil and gas markets. The associated megaprojects required extensive financial resources and wherewithal.

Then came the consolidation of companies particularly successful at developing natural gas assets in both new U.S. and international onshore shale plays. This success became an increasingly important source of growth and diversification. These deals included Shell’s purchase of British Gas (BG), Occidental’s acquisition of Anadarko, and Exxon’s acquisition of XTO. 

Capital scarce as high-quality inventory erodes

This decade has ushered in the next significant phase of industry consolidation. ExxonMobil announced plans to acquire Pioneer Natural Resources, arguably the most successful U.S. onshore shale driller in the prolific Permian Basin; Chevron plans to acquire Hess, which holds a significant non-operated interest in the most attractive exploration discovery in the past 30 years in Guyana; and most recently, Occidental announced plans to acquire privately-held CrownRock Resources, holder of a treasure trove of undeveloped acreage in the Permian. 

Today’s deals are being made as availability of high-quality drilling locations deteriorates. 

This isn’t happening in a vacuum; it is becoming harder to secure financing from traditional lenders and private equity firms, as many have pulled back from the sector. Meanwhile, costs are escalating, driven by equipment and services suppliers pressuring project returns, as well as climate-related challenges, and associated requirements to invest significant capital in emissions elimination, and participation in future abatement projects (including carbon capture and sequestration, and direct air capture).

New combinations aren’t guaranteed to deliver incremental shareholder value. Our research on prior upstream oil and gas M&A transactions suggests that only about half are accretive to shareholder value because deals often need to offset unfavorable commodity pricing cycles or poor merger execution. 

When combined with additional uncertainty related to future demand as a result of growing lists of climate-driven pressures to phase down fossil fuel production, an acquirer's ability to deliver incremental value is even further challenged. 

Of course, the opportunity to create incremental value does exist, and can be delivered, with an organized and disciplined approach. We typically see the following five levers make the difference in driving incremental value capture, including:

  • Build localized operating scale to enable reduced field operating costs and improved capital program efficiencies. Levers include optimal supplier coordination on drilling and completion programs, and common surface/subsurface equipment designs.
  • Transfer advantaged knowledge across subsurface/reservoir, surface/field operating, and digital capabilities, to apply across the broader combined asset base. This can increase production levels above the seller’s plans.
  • Capture supplier leverage through both purchasing scale as well as adoption of best price agreements.
  • Eliminate duplicative functions, particularly in administrative areas, through better organizational design and G&A cost improvements.
  • Leverage midstream agreements and differentiated hedging capabilities to secure capacity and maximize netbacks.

Of course, post-transaction integration and synergy capture execution are requisite back-end capabilities needed for success. Unfortunately, many executives lack the experience, practice, and time required to effectively drive an integration effort. As a result, post-merger integration efforts may lack the speed, decisiveness, and focus required to deliver on promised synergies.

When post-merger actions lose momentum, it results in compromises that lead to leaky value creation opportunities and unmet expectations. 

In order to avoid losing the plot of value synergies, management teams and boards must be diligent on the baseline and original synergy expectations across each component of the value agenda: 

  • Reserves
  • Capital
  • Drilling cost and methods
  • Operating cost and methods
  • Mineral ownership and leasehold obligations
  • Risk elements
  • Equipment operation and design 
  • Environmental issues
  • Legal challenges
  • Processing agreements
  • Technology rights 

Additionally, managers need the ability to create detailed and workable plans, with expected results articulated prior to closing. Combine this with a healthy post-merger program to ensure that costs move out as planned, and expected operating gains can be achieved.

With investors easily disenchanted with the sector, upstream companies must conduct careful analysis before making a merger or acquisition decision. If it’s done with the right strategy in place, after meticulous financial consideration, and with thoughtful, tactical planning before and after deal closure, the move can deliver the right kind of strategy to secure shareholder value. AlixPartners brings a robust approach to generate value throughout the transaction lifecycle based on supporting transactions within and outside the energy industry. Please feel free to reach out to get a conversation started.