Upstream Dealmaking to Almost Certainly Rise in 2022
This year will almost certainly bring an increase in upstream merger and acquisition (M&A) activity as high commodity prices bankroll acquisitions.
That’s what a research note - co-authored by Greig Aitken, corporate research at Wood Mackenzie, and Scott Walker, a senior research analyst for upstream M&A at Wood Mackenzie - posted on Wood Mackenzie’s website on Tuesday stated.
“It’s a trend we’ve been seeing for some months,” the research note added.
“Having ground almost to a halt in the first half of 2020, deal flow crept up steadily throughout 2021. In the latter part of the year activity reached levels not seen since 2018,” the note continued.
According to the research note, deal activity will increase if commodity prices hold.
“Companies’ ability to finance and execute acquisitions improved immeasurably through the course of 2021 - we can see this clearly in the increasing number of larger cash asset deals,” the note stated.
“If commodity prices remain elevated, the ability to execute transactions will only increase through 2022. A multi-year high could be ahead,” the note added.
Aitken and Walker outlined in the note that they don’t expect valuations to surge higher in 2022.
“That may seem counterintuitive in the face of the rising deal flow we do expect - more buyers surely equals more competition and therefore price inflation - but there are three mitigating factors in play,” the note stated.
“‘More buyers’ is not the same as ‘many buyers’. Outside North America, the pool of traditional buyers has reduced considerably. Competitive bidding for assets will remain limited to select countries and assets,” the note continued.
“Would-be buyers are not profligate. For many public E&Ps, particularly in North America, capital discipline is the current mantra. For private companies, particularly private equity, the focus on discipline is even sharper … [and] carbon is an increasingly important factor. The risk it brings will be priced in by buyers,” the note went on to state.
At the time of writing, the price of Brent crude oil was $82.08 per barrel.
Upstream M&A Picks Up the Pace in 1H 2021
In a separate piece published by Aitken and Walker on Wood Mackenzie’s website in September 2021, the company representatives outlined that upstream M&A had “picked up pace” in the first half of 2021.
The workers stated that deal activity recovered to 2019 levels and more than doubled in comparison to the low point in the first half of 2020, adding that North America was the epicenter of the renewal, with 80 percent of global deal spend attributable to this region. Europe was said to come in at second place and elsewhere, deal flow was said to have increased in all regions except Africa and Latin America.
In the piece, Aitken and Walker highlighted that 1H 2021’s ten largest corporate takeovers all took place in North America. Of these, the biggest surprise was Cabot’s $17 billion multi-basin merger with Cimarex, the Wood Mackenzie representatives noted.
“The deal was unusual in bringing together a gas player with a gas and oil player, just as Pioneer and others were extolling the virtues of single basin scale,” they stated in the company note.
“The multi-basin merger was soon followed by other diversifying transactions. From in-basin scale-ups to multi-basin mash-ups, companies combined at an incredible rate,” the Wood Mackenzie workers added in the note.
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