Oil and gas M&A activity appears buoyant in 2024 as crude prices dip

By all accounts 2023 was a bumper year for mergers and acquisitions in the oil and gas industry. Data gathered by multiple industry sources point to more than double the level of M&A deals last year versus the year before.

Much of the activity was driven by large cash flows from profits in the wake of energy price spikes caused by Russia’s full-scale invasion of Ukraine in February 2022. The world’s top integrated oil and gas companies alone completed $49.2 billion worth of M&A deals in 2023, up from $31.4 billion in 2022, according to global consulting firm EY.

If asset sales as well as announced but not completed M&A deals are clubbed with completed transactions, deals worth $256 billion were recorded last year by GlobalData. That’s an annualised uptick of 57% on 2022.

Leading the pack was ExxonMobil’s $60 billion acquisition of Pioneer Natural Resources announced in October 2023 and completed in May. Rival Chevron announced another big-ticket agreement to buy Hess for $53 billion last year as well. However, its completion may well be delayed until at least mid-2025 due to a legal dispute.

Evidence suggests this elevated level of M&A activity has continued well into 2024. However, the motivation for deals appears to be a little different given the market realities this year has thrown up for both buyers and sellers alike. 

Frantic activity, different motivation

Last year cash reigned supreme. Buyers flush with cash from bumper profits in 2022 went down the M&A route to boost their hydrocarbon reserve base by buying viable plays at elevated prices.

As 2024 brought yet more big-ticket deals like Diamondback Energy’s $26 billion swoop for Endeavor Energy (February) and ConocoPhillips’ $22.5 billion move for Marathon Oil (May), onlookers might be forgiven for seeing it as more of the same.

It is, however, anything but. While the core motivation of viable exploration and production plays is always central to the purchase, today’s oil and gas M&A market is about chasing a more competitive cost of supply and access to capital.

That’s because the oil price environment is likely pointing to a near-to-medium term price range of $65 to $85 per barrel, using Brent crude as a benchmark. Many, if not all, envision such a price range to become a regular feature of the market due to a regearing of oil demand from being ground transportation driven to industry, petrochemicals and aviation led within a matter of a decade or two.

Goldilocks M&A market of 2024

Such a line of thinking is gradually triggering a bit of a Goldilocks era for oil and gas M&A in 2024 – i.e. not too hot nor too cold but just right (read as financially pragmatic), to pinch a line from the famous children's story ‘Goldilocks and the three bears.’

Buyers and sellers in 2024’s industry consolidation wave appear to be bridging their valuation disconnection gap with a realisation that being bigger makes them more competitive and provides access to a wider pool of capital that can sustain operations in a gradually transitioning energy mix.

This is particularly true in the case of larger integrated companies like ExxonMobil, Chevron and ConocoPhillips swooping for pure play E&P companies with good acreages in producing bases, particularly for US shale.

Furthermore, both energy majors and institutional investors are doing a good job of convincing the wider industry that fewer, bigger and more efficient companies can march into the future more confidently. Reduction in operating costs and vertical integration are the twin pillars of their pitch.

Such a case in point is offered by one of the very first M&A deals announced of this year - the proposed merger of Chesapeake and Southwestern in January. Media headlines mainly focussed on how the merged entity will dwarf their rival and current US industry leader EQT to become the largest independent natural gas producer stateside.

But the transaction isn't just about bragging rights. The merged entity – it is said – will have 15 years of inventory sourced from "large scale acreage" and a "global marketing and trading presence in Houston to supply lower-cost, lower carbon energy to meet increasing domestic and international LNG demand."

Its shareholders can expect a 20% increase in dividends due to "significant synergies" and an increase in free cash flow generation over the next five years. That’s a deal rationale and future blueprint few would argue with.

So, even if deal valuations don’t quite match 2023 levels, expect further consolidation this year with similar offers to stakeholders stretching well into 2025. This may be particularly true of the US market, as sub-$80 oil prices bring many to the negotiating table.

• Gaurav Sharma is a London-based energy market analyst, commentator and a former global investment banking analyst. He is a regular contributor to global academic forums, energy industry events and OPEC conference streams.
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