For oil and gas, 2021 has ventured into better-than-expected territory with rampant transaction demand continuing from the first quarter on into the second and expected to amble along into the third and fourth.
Optimism gleaned from the Covid-19 vaccination rollout aided in the creeping rise in demand for oil across industries globally with travel’s return being the most accretive.
With that uptick has come M&A opportunities for strategics and basin consolidations.
After last year’s rough patches – that for many included restructuring exercises of varying degrees – some folks, whether they’re making money or not on their assets or portfolio companies and whether they’re approaching the end of their fund or not, see now as the time to make moves. That’s according to multiple private equity and legal sources.
“The buzzword of the day is ‘scale.’ Strategics are looking for synergies to become more efficient and cut G&A,” said Eric Otness, a partner in Skadden, Arps, Slate, Meagher & Flom’s mergers and acquisitions practice group based in Houston.
“That is what is driving all of the deals. That is the moment we’re in, and I think it is going to continue,” he added.
Sources are seeing a similar pipeline of deals among clients with the more aggressive strategics not necessarily looking at one deal, but a series of opportunities that would help get them to a size that they believe would help them survive and compete in this post-Covid environment as prices climb.
For upstream, sources expect to see more of the same for the rest of the year with opportunistic acquisitions by strategics that can expand their current footprint or possibly get into a new footprint. (Think the Southwestern-Indigo combination, in which Otness helped lead the Skadden team that advised Southwestern along with Frank Bayouth and Cody Carper.)
“If I had a crystal ball – I wouldn’t be doing what I’m doing now – but I wouldn’t be surprised if two or three years from now, there are a handful of big independents dominating the major basins in the U.S.,” said Otness when considering consolidations and the evolving role of strategics.
Beyond consolidation, midstream and infrastructure – especially getting gas to market – are expected to be among the transaction themes through the next decade. As the world gets smaller, companies are expected to continue to try to scale by way of the entire supply chain, whether that’s shipping or gathering downstream. And those moves could likely see companies look beyond U.S. borders that may have not ventured abroad previously.
It’s also potentially an area where not only could the market see some new companies emerge, but might introduce new ways to make money, according to Otness.
And that’s not to gloss over the growing and constant demand for clean and green energy sources and investment in the development of those sources from traditional oil and gas players. It’s just a question of where strategics and private equity can find footing that aligns with their responsibilities to investors.
“From the big strategics and multinationals to the private equity and traditional oil and gas-focused guys in Texas, they’re all thinking about green energy topics, what the world is going to look like 10 years from now and what will position them best to be able to make money in the next 10 years after that,” said Otness.