Market Analysis

Amid sector consolidation, US oil and gas M&A activity surged 57% in the previous year

Amos Simanungkalit · 20 Aug 20249.2K Views

Dealmaking activity in the oil and gas industry surged by 57% last year as energy companies ramped up development spending, fueled by increased cash flow from prior years' profits, according to a report released on Tuesday.

Top energy companies invested $49.2 billion in mergers and acquisitions (M&A) in 2023, a significant rise from $31.4 billion in 2022, as reported by Ernst & Young. This growth was primarily driven by large-scale deals among integrated oil and gas companies.

Ernst & Young predicts that M&A activity will continue into this year and 2025, with further mega deals on the horizon.

Investment in oil and gas exploration and development also saw a notable increase last year, with expenditures rising 28% to $93.1 billion.

The sharp uptick in spending on deals and reserve expansion represents a strategic shift away from the recent emphasis on shareholder returns over growth. Many firms had adopted this approach to attract investors who had previously distanced themselves from the sector.

In 2023, oil and gas companies significantly reduced spending on dividends and share buybacks, cutting it to $28.9 billion from a record $57.7 billion in 2022.

This industry-wide consolidation fueled M&A activity, pushing overall expenditures to $142.3 billion, a 36% increase compared to 2022.

"We observed a strategic shift in 2023, with operators focusing on consolidating their existing positions," said Bruce On, a partner in EY's strategy and energy transactions group, during an interview. He noted a renewed emphasis on investing in core operations.

With ample cash reserves, companies prioritized enhancing efficiency through scaling up and optimizing existing operations, he added.

However, profits in the sector declined by 55% in 2023, totaling $83.9 billion, mainly due to lower West Texas Intermediate (WTI) crude oil spot prices, according to the report.

Chevron (NYSE: CVX) emerged as the top acquirer in 2023, spending $10.6 billion on property acquisitions, including a $6.3 billion deal to purchase Denver-based oil exploration and production company PDC Energy (NASDAQ: PDCE).

Exxon Mobil (NYSE: XOM) finalized a $60 billion acquisition of Pioneer Natural Resources (NYSE: PXD) in May of this year. Meanwhile, Chevron announced a $53 billion agreement to acquire oil producer Hess (NYSE: HES) in October. However, this deal has been delayed until at least mid-2025 due to a legal dispute.