M&A Activity in Decline But Still Key: WoodMac

Merger and acquisition (M&A) activity in the global oil and gas industry is on track for its slowest year since the start of the century, although a decline in exploration has meant companies are relying more on takeovers to increase their resources, Wood Mackenzie wrote in a research note on November 12.

Upstream operators are looking to reshape their portfolios to become more resilient amid long-term demand uncertainty, the Edinburgh-based consultancy said.

“On the face of it this sounds like a paradox, but it is because the role of M&A in adding new barrels to company portfolios – in part because of a sharp fall in exploration – has become more important,” WoodMac research director Angus Rodger was quoted as saying in a statement.

Some 37% of resources added to upstream portfolios between 2005 and 2014 came from M&A, but the share rose to 46% between in 2015 and 2018, according to Rodger. Yet at the same time global M&A activity has been declining since 2014, dropping particularly steeply in 2019.

“We are on course for perhaps the slowest year of deals since the start of the century,” Rodger said.

Acquisition-fuelled growth “has been punished” by current market conditions, particularly in the US, WoodMac said, with investors piling pressure on companies to focus instead on capital discipline and greater profitability.

A bright spot has been the Asia-Pacific region, where M&A activity has been relatively high this year.

“But it will be interesting to see if this appetite for M&A can be maintained as the majors ramp up disposal programmes intended to leave them with smaller but higher margin regional footprints,” WoodMac said.

Chevron, Total and ConocoPhillips have all shed non-core Asia-Pacific assets in recent weeks, and ExxonMobil has launched divestment proceedings in Australia and Malaysia.

“Three quarters of the majors' Asia Pacific portfolios by value sit in Australia. This reflects both the importance of cash-generative long-life LNG assets, and the key role of gas in the energy transition,” WoodMac research director Andrew Harwood said. “Other regional projects that cannot compete for capital in the face of low-cost, high-margin opportunities elsewhere will become increasingly non-core.”

Exploration has recovered since the downturn in terms of value creation, with the main focus now on a smaller number of world-class regions containing more oil than gas, the consultancy said. But as gas becomes a greater focus as part of the energy transition, maintaining this improvement in value creation will be difficult.

“Of all volumes discovered over the last decade, over 50% was gas, and it is steadily increasing,” Rodger said. ‘But while the 'bridge fuel' is seen by many players as key plank of their energy transition strategies, gas is simply worth less than oil on a unit basis. Its per barrel of oil equivalent (boe) development value is often a third less than oil.”

There are better incentives for gas exploration in the Asia-Pacific zone, he said, thanks to proximity to existing infrastructure and strong regional demand.

“Declining utilisation across a number of key pipelines and liquefaction plants in Asia presents interesting opportunities,” he said, predicting the launch of new exploration campaigns in Indonesia, Australia and Malaysia over the next couple of years aimed at utilising this capacity.