Consolidation to become major theme in E&P’s transition

ora picWood Mackenzie claims consolidation among independents will only grow in the face of the E&P  transition

As oil and gas investors move towards stable dividends, with strong balance sheets, a low cost of capital and top-quartile ESG ratings, upstream exploration and production companies (E&Ps) face divisive choices.

Vice president of Wood Mackenzie, Luke Parker, said, "The independents' strategies will need to evolve, as they move to minimise risks they can control. For most, investment horizons will get shorter across the board – exploration, development, and acquisition. Anything that does not pay back in a narrowing timeframe will be increasingly overlooked.

“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.” 

Looking ahead at the future of the E&P transition, consolidation will be a defining theme; many independents will combine either as 'mini-majors' with expanded carbon capture, utilisation and storage, or as 'pure-plays' with more specific attributes at scale.

Parker added, “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.” 

Some consolidation opportunities include: 

- New big energy players - oil and gas companies shrinking their upstream operations, or exit oil and gas completely

- New big oil players - vertical mergers and value chain integration during late-cycle industry consolidation

- Big oil getting bigger - with Chevron's acquisition of Noble a possible sign of things to come

Parker claims it may have already started, “We may come to look back on the last few months as the beginning of the consolidation that will define the oil and gas sector over the coming decade and beyond.” 

Private capital may also bring opportunities in buying low-multiple and high cash-flow companies that may otherwise struggle to attract new funding. 

Wood Mackenzie has valued the listed independents that did not or could not adjust face wind-down in the longer term, and will most likely not make it to 2050, at nearly USD$1 trillion; six times the amount that PE spent in upstream M&A in the last 10 years.

While wind-down will be a strategic choice for many, it is an easier option for private rather than public companies, a prime reason for changing ownership in the coming decades.


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