The oil & gas sector was hit especially hard in the first half of 2020, when oil & gas prices plummeted due to two main factors, a price war between major producers Saudi Arabia and Russia and falling demand because of COVID-19 lockdowns. The value of US oil & gas M&A approached all-time lows in H1 2020, but it spiked in Q3 2020.

Year-on-year, oil & gas M&A value increased more than eightfold to US$45 billion in H1 2021. Volume over this period rose by 73 percent to 71 deals. The positive year-on-year comparisons consolidated the gains made in the second half of 2020, when 86 oil & gas deals worth US$77 billion were agreed. A recovering oil price, which has almost doubled over the last 12 months, from US$37 per barrel in June last year to around US$70, has supported the M&A rebound and given investors the confidence to pursue deal opportunities.

Building scale

The largest oil & gas deal announced so far this year was shale gas player Cabot Oil & Gas’s proposed takeover of Cimarex Energy for US$9 billion. The deal will create a US$17 billion energy company with the scale to ride out future commodity cycles with resilience and deliver steady cash flows and dividends for shareholders. The acquisition will provide geographic diversity, combining Cabot’s natural gas assets in Pennsylvania with Cimarex’s operations in the Permian Basin and the Mid-Continent Oil Field in the American Southwest.

The transaction is part of a trend seeing independent US producers consolidate to gain scale as the industry recovers from the disruptions of last year, taking advantage of a strong current oil price while building portfolios that will be resilient in the face of potential future volatility in commodity prices.

The third-largest transaction of the sector in H1 was another example of this trend. The US$4.4 billion deal saw KKR-backed Independence Energy merge with Contango Oil & Gas. The merger will combine assets in basins ranging from Colorado to Texas and the combined entity will remain acquisitive, seeking larger targets, according to Contango Chairman John Goff.

The same theme is present in oil and gas infrastructure operators. In the second-largest deal in the sector, Energy Transfer, which owns and operates a portfolio of energy transport assets in the US, bought Enable Midstream Partners, an operator of natural gas and oil pipeline infrastructure assets, for US$6.9 billion. The deal will give Energy Transfer greater connectivity in the Mid-Continent Basin and the Gulf of Mexico Coast, according to the deal announcement.

A greener future

M&A is expected to remain a theme across the US energy sector as the Biden Administration focuses on targets to achieve net zero carbon emissions by 2050.

Oil & gas companies will use M&A as a lever to either pivot their portfolios away from over-reliance on hydrocarbons or build scale as demand for fossil fuels tapers off in line with the transition to renewables.

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