It was a transformative 2023 for oil and gas, as a flurry of year-end mega deals drove the sector’s most merger and acquisition spending in over a decade. Major moves like Chevron’s acquisition of Hess and ExxonMobil’s purchase of Pioneer Natural Resources signaled a return to consolidation, after years of price volatility and waning investor interest.
This momentum has carried into 2024, most notably with Diamondback Energy’s $26 billion acquisition of Endeavor Energy Partners. Jefferies served as lead financial advisor on the deal.
Jefferies Insights caught up with Greg Chitty and Conrad Gibbins, two of the deal’s architects and Co-Heads of Upstream Americas, to discuss the current dealmaking and capital markets environment in oil and gas; what the Diamondback deal means for the sector’s future; and more.
Their conversation took place just before news that ConocoPhillips has agreed to acquire Marathon Oil for $22.5 billion, the latest mega-merger in the oil and gas industry.
Oil and Gas Bucked Market Trends. Can They Continue to Overperform?
Oil and gas bucked broader market trends in 2023, a year when high interest rates and recession fears dampened dealmaking. M&A volumes and values declined by 6% and 25%, respectively, and hopes for a rebound in 2024 have yet to materialize.
So, what accounts for oil and gas’s overperformance, and can we expect more dealmaking despite a sluggish M&A market?
“It’s a convergence of different factors,” Gibbins explained. “First, post-Ukraine, we’ve seen renewed appreciation for energy security, and capital has returned to the market. Second, oil and gas companies have impressed, demonstrating capital restraint, discipline, and returning capital to shareholders. Third, we’ve had price stability. When there’s minimal volatility in our business, we can always get deals done.”
The top five Western oil and gas firms — BP, Chevron, ExxonMobil, Shell, and TotalEnergies — returned over $111 billion to shareholders through dividends and share repurchases in 2023. In the late 2010s, concerns about the sector’s long-term viability and price volatility caused a decline in investor interest. Today, as the industry’s leaders return more money than ever, institutional investors are being lured back.
“The market is rewarding consolidation. Just look at the Diamondback deal: the stock was up over 20% after the announcement,” Chitty added. “With investors supporting deals, we should see more activity in public markets, but also across the board.”
Chitty elaborated on the downstream effects of large-cap M&A for the sector. As consolidation continues, smaller private companies will need to take steps to become more attractive to larger public firms, creating a ripple effect throughout the industry. Both he and Gibbins predicted a steady stream of deals of all shapes and sizes. This proved true recently, as Jefferies served as exclusive financial advisor in two deals announced in July:
- Point Energy Partners in their sale of assets to Vital Energy and Nothern Oil and Gas Inc., in an all-cash transaction for $1.1 billion.
- Total Operations and Production Services (TOPS) in their sale to Archrock (NYSE: AROC) in a transaction valued at $983 million.
What Goes Into Executing High-Profile M&A?
The timing and synergies between high-profile M&A can often seem opaque, but Chitty and Gibbins shed light on why the conditions were ideal for the Diamondback and Endeavor deal, which will undoubtedly be one of the year’s defining transactions.
“One of the unique factors in this deal was the narrow market,” Chitty shared. “You’d normally have four or five large-caps eyeing a company like Endeavor, but two of them, Exxon and Chevron, were sidelined by the FTC. Some thought Conoco was in pole position, but we were able to offer the most attractive option to the selling party.”
Gibbins expanded on some of the specific synergies that made Diamondback’s offer attractive: “both companies are Midland-based. That was very important to the seller, because it meant the employee base could be retained. The businesses also have similar cultures – very nimble and entrepreneurial. Altogether, there were strong industrial, administrative, cultural, and financial synergies to the transaction.”
Future Predictions: Consolidation Dominates
As major geopolitical events, including the Russo-Ukrainian and Israel-Hamas wars, continue to strain global oil supply, many investors expect American companies — upstream, midstream, and downstream — to continue to perform. The conversation concluded with Chitty and Gibbins’ predictions for the future, and they doubled down on one clear trend: consolidation, consolidation, consolidation.
“Today’s oil and gas companies can’t double and triple through organic growth,” Chitty said. “If they want to keep attracting investor interest, they have to get bigger and bigger. The way to do that is consolidation.”
Gibbins shared similar insights, emphasizing “investor relevance” as a driving force.
“Think about tech: there’s a handful of names that capture investor attention. Oil and gas is the same,” he explained. “A few large-cap companies appear on every index. For the other 47 or so companies that aren’t included, consolidation is how they achieve the scale needed to attract investors.”
For more insights from Jefferies, the leading advisor on M&A transactions in the energy sector for the last decade, visit Jefferies Insights.
