Editorial comment

Those pipeliners who keep an eye on the upstream sector will have noticed that last year’s merger mania is continuing into 2024. In January, Chesapeake Energy and Southern Energy announced their merger, for nearly US$12 billion.

2023 saw a bumper crop of M&A activity upstream, the biggest of which was ExxonMobil’s US$59.5 billion acquisition of Pioneer Natural Resources, which created the world’s first ‘megamajor’ (and was the largest upstream deal since 2015). Other deals in 2023 included Chevron’s US$60 billion acquisition of Hess Corp; Occidental Petroleum’s purchase of CrownRock; Harbour Energy’s US$11.2 billion acquisition of Wintershall Dea; and Tokyo Gas purchasing Haynesville Shale gas producer Rockcliff Energy for US$2.7 billion.

Wood Mackenzie’s What to Look for in 2024 upstream series outlines some key themes for the upstream sector in the coming year. Continued consolidation is expected: “For deals to work, they need to demonstrate improved operational, financial and, for some deals, emissions performance,” said Fraser McKay, Head of Upstream Analysis for Wood Mackenzie. “Some buyers may follow ExxonMobil’s playbook with Pioneer and look to bring unique data, technology, and processes to a basin. Others will be marriages of convenience. But not all deals will work, and it will remain hard for smaller international Independents to prove tangible synergies between disparate portfolios than their larger more diversified brethren.”¹

In January, ratings agency Morningstar DBRS gave its view on the global pipeline and midstream industry in 2024, declaring the outlook ‘neutral’. “We expect oil and gas prices to soften in 2024; however, we expect excess supply to primarily drive the softening. Consequently, we expect asset utilisation in the sector to remain strong as rising energy exports drive up oil and gas production in North America. Additional tailwinds include consolidation among oil and gas producers, which should improve counterparty risk profiles, stabilising interest rates and moderating inflation.”²

Morningstar DBRS’s point about consolidation among producers is key here. Upstream oil and gas sector M&A deals are, more often than not, strategic tools for various end points: diversification, to counteract the effect of declining reserves, and to secure future resources. Likewise, we’ve seen midstream mergers happening so that companies can gain access to strategic pipeline networks, gathering lines, processing assets, storage, and other important infrastructure. Sometimes it’s about a move into the Permian, or an acquisition of CO2 pipelines, or for exposure to overseas markets.

Forbes states that: “Mergers and acquisitions of other pipeline companies [is] the surest way by far to grow earnings and dividends, at least for the next few years”.³ In the midstream sector recently, we have seen a host of activity: Magellan Midstream Partners merged with ONEOK Inc.; Phillips66 bought DCP Midstream; Energy Transfer acquired Lotus Midstream; Kinder Morgan closed on its purchase of NextEra Energy Partners; Pembina Pipeline acquired some of Enbridge’s JV interests; and of course Sunoco is set to buy NuStar Energy for US$7.3 billion.

Midstream companies seek out deals like this to “gain the scale, scope and synergies they think they will need to succeed in an increasingly competitive industry.”⁴

Analysts are split on how to view this glut of M&A activity: does it show “that there is significant industry confidence that oil and gas demand is set to remain healthy for some time” (Raj Shekhar, GlobalData)?⁵ Or is it an acknowledgement that the energy transition is here and, “rather than spending lots of money on exploration or developing new projects, companies are pursuing a more risk-averse strategy [of] buying into existing production” and assets (Mike Coffin, Carbon Tracker)?⁵

Elizabeth Corner
Senior Editor

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Editorial comment

Elizabeth CornerSenior Editor

Elizabeth Corner
Senior Editor