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Deloitte Oil and Gas M&A Outlook: Shifting Strategies Reshaping Global Transactions Market in 2020 and Beyond

February 11, 2020 GMT
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HOUSTON, Feb. 11, 2020 /PRNewswire/ --

Key takeaways

Bigger was better in 2019
While total deal value in 2019 increased 40% to $370 billion, thanks to several upstream and downstream mega-deals, overall deal count declined year-over-year (YOY) by 40% as companies continue to struggle with low commodity prices and challenging market conditions, according to Deloitte’s “2020 Oil and Gas M&A Outlook.” The annual report explores the factors that impacted 2019 M&A activity and provides insight on trends to watch for in 2020.

A look back at 2019: M&A sector by sector

Key quotes

“As we enter 2020, the new decade seems to be ushering in a new era of oil and gas portfolio design driven by changing shareholder and investor expectations. As portfolio optimization, capital discipline and sustainability issues move increasingly to the core of corporate decision making, the drivers and types of deals will likely evolve.”

- Duane Dickson,
vice chairman and U.S. oil, gas and chemicals leader, Deloitte Consulting LLP

“Facing continued headwinds, many private equity firms are being forced to hold their investments for a longer period as an IPO or sale to a corporate buyer is often not a feasible exit strategy, except for the most valuable positions. These challenges are pushing most portfolio companies to focus on operations to generate returns, until an exit can be made.”

- Melinda Yee,
partner, Deloitte & Touche LLP

M&A outlook for 2020: More of the same, but a little bit different
According to the report, absent an increase in commodity prices, the dampened level of deal making activity is expected to continue in 2020. However, as many companies change their portfolios to match external market conditions and their own shifts in strategic priorities, evolving trends and themes could shape the oil and gas transactions market in the year ahead and beyond.

Past M&A to spur future M&A activity
The largest driver in 2020 divestitures will likely be massive 2018 and 2019 acquisitions. Upstream companies involved in recent deals are expected to continue to realign their portfolios and strategies while also looking for divestment opportunities that allow them to focus on expanded footprints and assets.

Pursuing greener pastures means divesting higher carbon assets
In looking at existing assets, some companies are considering carbon footprints when it comes to divestitures. As investor sentiment has changed, oil companies have increased their discussion of environmental, social and governance (ESG) issues. As the size of ESG investment funds grow, so could oil and gas companies’ interests in burnishing their environmental credentials. To that end we will likely see not only increased renewables investment but also carbon-based divestures.

Majors expected to be primary catalyst for global M&A
In 2019, the majors divested a wide swath of assets across a range of geographies and resource types. The pace may slow down this year, but opportunities remain for further portfolio streamlining with some potentially large asset divestitures across U.S. shale plays, the North Sea and Asia-Pacific in play.

Integrated and national oil companies moving onward and downward
To capitalize on growing chemicals demand, most international oil and gas companies are continuing to expand their downstream footprints, beyond refining assets, and into distribution, retail, and chemicals businesses. This investment push, that has primarily targeted integrated refining and petrochemical assets, as well as fuel and natural gas networks in the Middle East and Asia Pacific, is expected to continue.

Capital markets freeze could prompt upstream and OFS consolidation
In 2020, we could see more consolidation of upstream and OFS companies as capital markets refuse to thaw, and topline U.S. production growth continues to decline. Sellers and management teams, however, might need to be willing to forgo significant premiums to get the deals done in order to achieve the synergies and economies of scale that form the strategic basis for executing the deal — which may make stock more palatable as currency.

Private equity strategy shift may bring shale sector consolidation
A pivot in private equity’s traditional strategy may accelerate consolidation in shale. With the oil and gas IPO market dead in the water and debt issuance trending monotonically downward since 2014, private equity firms and their portfolio companies are rethinking their traditional build-and-flip strategy. The year 2020 may see the build-to-operate model fully take flight in the Permian and beyond.

Connect with us on Twitter @Deloitte4Energy; @Duane_Dickson; @MYee_Energy or on LinkedIn at Duane Dickson; Melinda Yee.

About Deloitte
Deloitte provides industry-leading audit, consulting, tax and advisory services to many of the world’s most admired brands, including nearly 90% of the Fortune 500® and more than 5,000 private and middle market companies. Our people work across the industry sectors that drive and shape today’s marketplace — delivering measurable and lasting results that help reinforce public trust in our capital markets, inspire clients to see challenges as opportunities to transform and thrive, and help lead the way toward a stronger economy and a healthy society. Deloitte is proud to be part of the largest global professional services network serving our clients in the markets that are most important to them. Now celebrating 175 years of service, our network of member firms spans more than 150 countries and territories. Learn how Deloitte’s more than 312,000 people worldwide make an impact that matters at www.deloitte.com.

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SOURCE Deloitte