What level of M&A activity and what sized deals can we expect to see going forward?
Elvira Scotto: We expect to see more M&A activity in the year ahead. However, we expect to see more bolt-on or tuck-in type acquisitions versus large corporate deals. Longer-term, we do think we may see larger scale consolidation as companies look to gain scale and diversify their cash flows, especially as growth opportunities slow.
Robert Kwan: Greater M&A activity has been very topical. We've seen a fairly large deal done down here in the US. What we're hearing from the Canadian companies is that large scale corporate M&A is not required for them to execute their strategies, and frankly, they're not particularly interested in large-scale deals. What a number of these companies are pursuing is smaller tuck-in deals, acquiring an asset that fits very nicely and is complementary to their existing business.
Luke Davis: I think M&A will continue to be a theme going forward, particularly for smaller producers as they continue to want to improve scale, growth, and become more relevant.
How are companies approaching their M&A strategies?
Michael Harvey: There’s been lots of great dialogue between corporates, investors and RBC this week at the conference, and a focus on M&A strategies has been a key takeaway from lots of conversations. I’d say companies are pretty open to adding inventory - the issue is all of the boxes that need to be checked to get those transactions done.
Strategically, therefore, successful M&A today comes down to financing and timing. I think that whilst we are seeing companies look to get bigger and better, there’s going to be a more thoughtful approach from corporates now, as they approach new transactions.
Elvira Scotto: I think for midstream companies, having disciplined capital allocation policies and a strong balance sheet are really key. This type of strategy can allow companies to weather any potential storm, such as recessions or commodity price volatility – and allow them to take advantage of various growth opportunities, or potential M&A opportunities, as they arise.
Biraj Borkhataria: We think that majors in particular, should be consolidating the sector. We think they are in the public domain and therefore under a lot of scrutiny to disclose emissions etc. Therefore, they should be active in trying to consolidate the industry.
Is today’s volatility impacting M&A activity levels across the energy sector?
Scott Hanold: M&A has always happened in the energy space. I’ve been involved in the industry for almost three decades and there's always been cycles, but consistently there are also always acquisitions. I think the key to greater activity is reducing the volatility in the commodity prices. Volatility creates wide bid ask spreads. At that point it's hard to get buyers and sellers together. If we could reduce some of the volatility, I think you'll see a lot more activity on the M&A front.
Biraj Borkhataria: The macro outlook and environment is uncertain and has changed so much in the last three years it's difficult to say what the standout strategies are. I think going forward, balance is probably the best thing for a company. Some of the activism in the sector is implicitly trying to get companies to shrink, but we don’t think that’s the right thing to do.
How can analysts track global oil demand in today’s environment?
Michael Tran: Regarding the way we monitor global oil demand, let's forget about forecasting. It's all about “nowcasting”. What we've done over the course of the past 18 months within my Digital Intelligence Strategy platform is build out a lot of new tools. We've really sharpened our pencils to allow us to understand what's happening in real time.
For example, to understand gasoline demand going into the summer months, we've effectively built a gasoline station tracker. We've drawn geofences around 135,000 gas stations in the U.S. We also use GPS data to monitor how many cars drive through gas stations every day. On top of that, we're able to superimpose census data to understand if this gas station rests in a very affluent neighbourhood versus a less affluent neighbourhood. When we stack up those three components it allows us to paint a mosaic of what the consumer looks like. As a function of that, we can understand consumer gasoline demand in real time.
Scott Hanold: In this macro environment there's a lot of uncertainty out there, especially with OPEC recently reducing their production volumes for the second time this year. There's not a lot of producers looking to grow production. The reality is, until the markets at a point where it makes sense, they're going to stay disciplined and that's been the key to the success of the industry.
What is the outook on commodity pricing?
Michael Tran: Prices should move higher as we get into the second half of the year because we should start seeing large stock draws. The problem is that the physical oil market has been loose and sloppy all year long. What's really important here is that China needs to buy more barrels. OPEC needs to cut more production to really tighten the market. On top of that, we really need to see global oil demand start to pick up before the physical market can clean up. That should send oil markets higher. The bottom line here is that the physical markets are undefeated.
What are corporates prioritizing given recent market performance?
Michael Harvey: Return of Capital programs remain front and centre for most corporates. You're not going to see them cut dividends any time soon, given that crude prices are down a bit from their highs. Those programs are going to remain a clear priority as we go forward into the second half of 2023 and into 2024.
Regarding commodity prices, I'd say the broad majority of the corporates we meet are pretty constructive on oil prices and maybe a little more muted on natural gas. The exception to that would be natural gas on the Canadian front into 2025 and 2026, when a variety of LMG projects come on stream. I think there will be a bit more of a bullish outlook at that point.
