Wood Mackenzie suggests Big Oil may continue “getting bigger” and believes US major Chevron's acquisition of Texas-based Noble Energy could be a “sign of things to come”
Wood Mackenzie’s analysis warns that there are a number of issues operators should keep in mind with the higher oil prices (Credit: Pixabay/ArtTower)
Consolidation is set to become the “major theme” amongst exploration and production companies (E&Ps) in their energy transitions, says an analyst.
As the world attempts to shift away from its heavy reliance on fossil fuels, the pressure is increasing on energy firms – including E&Ps – to reduce emissions and help prevent the possibility of runaway climate change.
With oil and gas investors gravitating towards stable dividends, underpinned by a strong balance sheet, a low cost of capital and top-quartile ESG ratings, upstream E&Ps look set to face existential choices.
2C path doesn’t need thousands of Independents “chasing volume”
Wood Mackenzie vice-president Luke Parker said a world on a 2C path – the minimum expectation under the Paris Agreement climate pact – “does not need thousands of Independents chasing volume”.
“The Independents’ strategies will need to evolve, as they move to minimise risks they can control,” he added.
“For most, investment horizons will get progressively shorter across the board – exploration, development, and acquisition. Anything that does not pay back in a narrowing timeframe will be increasingly overlooked.
“But with that shift, the very nature of the Independents will change. The risk-reward balance that has always been core to the E&P ‘value proposition’ gets diluted.
“Independents increasingly look and act like larger companies, only without the advantages of actually being a larger company.”
Parker believes consolidation will be the “major theme” for E&Ps over the coming decades.
This is because many of the “most attractive” Independents will combine, either as pure-plays with niche attributes at scale or diversified “mini-majors” with growing carbon, capture, utilisation and storage (CCUS), or renewables businesses.
“The Independents that positioned themselves well for this future – advantaged assets, cash generative, resilient to low prices, strong balance sheet, top quartile ESG – are best placed to evolve,” Parker added.
“They are able to remain Independent for longest, but they also make the most attractive consolidation targets.”
Potential pathways for E&Ps in their energy transitions
Wood Mackenzie highlighted some potential consolidation pathways for E&Ps as part of their transitions.
It said oil and gas companies could shrink their upstream operations, or even exit oil and gas completely, leading to the creation of “new big energy players”.
There could also be “new big oil players”, as vertical mergers and value chain integration could be set to be a “common feature of late-cycle industry consolidation”.
Wood Mackenzie suggests “Big Oil” may continue “getting bigger” and believes US major Chevron’s acquisition of Texas-based Noble Energy could be a “sign of things to come”.
According to Parker, these trends may already have already started.
“We may come to look back on the past few months as the beginning of the consolidation that will define the oil and gas sector over the coming decade and beyond,” he added.
The analyst believes privatisation will “also be part of the story”. He said private capital – private equity (PE), hedge funds, sovereign wealth funds – will see opportunities in buying low-multiple and high cash-flow companies that would “otherwise struggle to attract new funding”.
He added: “Essentially we are talking about companies that will find it increasingly difficult to operate in public hands.
“Taking them private – free from stakeholder pressure, with an advantaged cost of capital and different investment horizon – could be a lifeline to many.
“But while this will be a theme in the evolving corporate landscape, it will not be dominant. We do not expect to see the entire E&P space taken private. Cost will be an issue for one.”
Independents unable to adjust will face a “wind-down in the longer term”
Wood Mackenzie values the listed Independents at nearly $1tn, which is six times the amount that PE spent in upstream M&A over the past decade.
It believes the Independents that do not or are unable to adjust will face a “wind-down in the longer term”.
Parker said that while mergers among them may “prolong the inevitable”, most will “not make it to 2050 in any guise”.
But he claims a wind-down will represent a “strategic choice for many, rather than unwitting oversight”. This will be easier for private than public companies, and a prime reason for changing ownership over the coming decades.
Parker added: “In a future that threatens terminal decline and massive value destruction, the dynamic is shifting. The Independents will no longer get endless chances to re-invent themselves. Failure at the margin will, increasingly, be terminal.”