Preparing for the uptick in upstream M&A

By: Paul Carthy, Managing Director, Energy Industry Group, Accenture in the Middle East

Extended weakness in oil and gas commodity markets, combined with fewer capital sources, is setting the stage for an increase in upstream merger and acquisition (M&A) activity. We’re already seeing the rebound in upstream M&A. By late last year, M&A activity was back in line with the average quarterly deal values over the previous three years. The surge in M&A deal value is happening even though upstream companies’ enterprise values have dropped by 30-100 percent (2019 vs. 2020), which would have a negative impact on deal values, all things being equal.

M&A is reshaping the industry: How OFES companies can prepare Many in the industry will not be surprised that Independents, which are most at risk of cash flow and capital challenges, are leading the M&A charge. However, given the severity of current market conditions, it’s not hard to imagine a much larger industry consolidation among supermajors.

An acceleration of upstream consolidation will not be good news for oilfield equipment and services (OFES) companies. It will mean their customers will have greater bargaining power. And it will likely increase the overcapacity of OFES resources. Both outcomes will extend the time for pricing to bounce back. As a result, OFES companies must consider how they will position themselves going forward. I believe five actions can help them survive in today’s market context:

• Reassess the customer mix – The simplest “no regrets” move is to challenge the customer portfolio mix. How can you shift your portfolio to increase the percentage of work coming from those who are likely to survive in a consolidated market?
• Get serious about an environmental, social, and governance (ESG) strategy. A consolidated upstream market will likely shift power towards the Majors and leading Independents. These are the players that are also the most likely to address their carbon and environmental impacts. There is not a clear carbon business case in the OFES sector today beyond internal efficiencies. But is there a strategic case to align ESG strategies even if the premium doesn’t yet exist? Or, for the foreseeable future, is this just talk?
• Strengthen customer partnerships – As upstream companies consolidate, they will increasingly pursue strategic OFES supplier partnerships to optimise their spending. We already see a sign of this in the increase in integrated tenders globally. To compete, it is no longer good enough to have top-quartile service quality and competitive pricing; going forward, exploration & production (E&P) companies are looking for OFES partners who can also enable them to accelerate their digital strategies as well—both by providing seamless access to data from their services and pushing the frontier by designing digital solutions of their own.
• Reevaluate commercial models – If OFES companies want more resilient partnerships with customers, they will need to be smarter about how they participate in and design commercial models. OFES companies must act now. Instead of waiting for the inevitable “supplier letters” to be sent from merged customers asking for lower prices, they should proactively identify opportunities to create greater value (often through digital solutions) that can change the conversation with customers from one about price to one of high order KPIs.
• Accelerate OFES consolidation – Upstream companies have consolidated much more rapidly than OFES companies, and several OFES segments are over-fragmented and long overdue for further consolidation. Comparing OFES to other asset-intensive industries provides evidence to this point. OFES leaders must be more aggressive with M&A to reduce cost and increase supplier power.

Down, but not out

OFES companies, like so many others in the energy value chain, have been hurt by persistently low oil prices and, more recently, the drop in demand for refined products brought about by COVID-19. An accelerated pace of M&A activity among upstream companies will likely cause even more pain in the short term. That pain, however, will not be evenly distributed.