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Buy, Buy, Buy - Upstream Consolidation Surges on Drive to Maximize Cash Flow

In March 2020, the collapse of the OPEC-plus coalition, the initiation of COVID-19 lockdowns, and other factors pushed the U.S. E&P sector to the brink of insolvency. Crude oil prices had crashed to $20/bbl — one-third their level at the start of that fateful year — and producers had shifted to survival mode, slashing capex, cancelling infrastructure projects, and eyeing new, more dire worst-case scenarios. Who would have thought that only 22 months later E&Ps would be winning back investors and enjoying sky-high share prices? Of course, the recovery in commodity prices played a major role in this reversal. But another driver has been an unexpected wave of corporate consolidation that has allowed many E&Ps to boost their inventories of high-margin assets, accelerate free cash flow generation, and grow shareholder returns while slashing capital and corporate expenditures. In today’s RBN blog, we examine the forces behind — and the implications of — the most important surge of corporate upstream deals in two decades.

In the past 18 months, the value of announced U.S. corporate transactions in the E&P space soared to $82 billion, more than eight times the total of the previous 12 months. Most significantly, these deals involving publicly traded companies accounted for three-quarters of total M&A transaction value and included more than 20 transactions valued at over $400 million. Concurrently, several major private equity firms have been merging their portfolio companies into a single entity — or “smash-co,” to use the industry term.

This combination of public and private deals is the most impactful wave of corporate consolidation among E&Ps since the turn of the century two decades earlier, when a plunge in oil prices spurred mega-deals that helped to form many of today’s supermajors (Exxon/Mobil, BP/Amoco/ARCO, and Chevron/Texaco) and large independents (Anadarko/Union Pacific/Kerr McGee, ConocoPhillips/Burlington Resources, and Devon/Mitchell Energy/Ocean Energy). The oil price crash in 2014 seemed to be setting up the same predator-prey scenario, as many producers had bloated balance sheets from massively outspending cash flow to build acreage inventories in multiple unconventional plays. But, with few exceptions, that didn’t happen and we didn’t see a big wave of consolidation. Instead, companies turned inward, shedding non-core assets to concentrate on core plays.

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