2019 represented a very slow year for mergers and acquisitions (M&A) in the oil and gas sector, with many companies struggling to adapt to market challenges and achieve a good return on their capital. Deloitte, the multinational professional services company, carried out an analysis with projections of M&A deals in the sector for 2020, where it estimated that by 2020 companies would still have to face challenges that would slow down the completion of M&A deals. Among the challenges highlighted by the analysis was a complicated investment environment and restricted access to financing. However, its projection for 2020 reflected that the types of deals would evolve along with industry markets and the underlying balance sheets of companies, resulting in more divestments by large companies, more purchases from small companies, and a general realignment of investment portfolios.
Their projections -which were based on recent agreements in the sector, the impact of trade, and commodity prices- focused on five major predictions for 2020:
1. Divestment of non-core international assets
In 2019, the world’s largest industry players divested themselves of a wide range of assets across a range of geographies and resource types. By 2020, Deloitte estimated a further rationalization of the portfolio with some potentially large assets at stake. Moreover, it further estimated that mergers of major players in 2020 could also contribute to divestments as strategic decisions are made on portfolio approaches.
2. Growing interest in “green” opportunities
The world’s leading oil companies are looking to invest in energy and renewable energy markets; and by 2020, Deloitte estimates that they would start analyzing their existing assets and considering carbon emissions in relation to possible divestments.
For these companies, there are many incentives to become greener by cleaning up their investment portfolios. Among the main incentives for diversifying their assets are investor satisfaction, regulatory scrutiny, mitigation of long-term demand risks, and social pressure to prioritize the environment.
Because of this trend, and the change in sentiment among major investors, Deloitte estimated that is very likely that we will see more investments in renewable energy and carbon-based disinvestments in the near future.
3. Progress in the downstream sector
Integrated and national oil companies continue to advance in the downstream sector, which refers to crude oil refining and natural gas processing and purification activities. These companies have expanded beyond these downstream refining activities into the distribution, retail and chemical businesses. Large investments have been made in integrated refining and petrochemical assets, such as fuel and natural gas networks in the Middle East and Asia-Pacific.
By 2020, Deloitte estimated that M&A transactions in the sector would be limited but could have a large impact in Asia and the Pacific because there are strong incentives to invest in the region. In addition, Deloitte estimated strong growth in fuels and chemicals in China and India, the largest developing economies.
4. The consolidation of upstream companies
During 2019, and despite concerns about cash flow in major shale mining areas, an interest in capital discipline and reduced production prospects emerged. For this reason, several companies in the upstream sector have consolidated through significant mergers.
Deloitte estimated that by 2020 there would be more interest in this type of consolidation, as capital markets refuse to thaw and US production growth will be somewhat more limited. In addition, Deloitte said that these mergers could bring economies of scale and scope and result in larger, more consolidated portfolios of shale assets.
5. A new investment strategy
According to Deloitte, the traditional strategy of private oil and gas capital is being rethought, considering a new model of construction and operation. Within this new strategy it was expected, among other things, the consolidation in the shale industry due to the acceleration in the completion of mergers, an increase in private equity deals to private equity focused on reducing portfolio overspending and creating economies of scale, and growth in the management teams as the operation of the assets and the production of the marketing will require a broader set of skills.
By 2020, Deloitte said that portfolio reorganization and liquidity driven transactions would play a major role as they could have a significant impact on funds.
With the end of 2020 approaching, it should be noted that Deloitte’s projections have been mostly successful. However, it is important to note that 2020 has been a year where the oil and gas sector has had to face many challenges, including unstable oil prices, major technology disruptions, growing trade tensions, labor shortages, oversupplied markets, and the global economic downturn. In the current context, the outlook for the oil industry in 2021 seems bleak as the recovery in demand appears to have stalled.
With this in mind, oil companies must look for alternatives that allow them to increase profits from produced oil; and it is precisely here where technology becomes the best ally to overcome current and future challenges. Now more than ever, companies must implement innovative technologies that allow them not only to achieve a projection of greater value and profitability, but also to reduce the environmental impact of conventional technologies, offer less risk, and minimize the use of resources and time. Only by doing so, oil companies will be able to successfully overcome the challenges of the future.
Owner of several companies in the energy and mining sector, and inventor of the design and engineering of the Super Matroid Heater and Ultra Filtration Systems for the oil and gas industries.
