A ‘Goldilocks Era’ for Oil and Gas M&A

Oil and gas markets have reached a low- or no-growth business model, yet recent months have produced a surge in M&A activity not seen for a generation. Tim Perry and Nick Woodruff, of RBC’s Global Energy team, join Vito Sperduto to take the temperature of the sector and analyze the current state of energy valuations.

By Tim Perry, Nick Woodruff & Vito Sperduto
Published May 29, 2024 | 22 min read

Key Points

  • A dash for cost of supply and access to capital is driving consolidation in the energy sector.
  • While yields are high relative to S&P 500 averages, energy valuations remain cheap.
  • M&A opportunities in the private market are attracting significantly higher values than public opportunities.
  • With oil and gas prices at mid range, boards are well placed to move on transactions.

View audio transcript


What’s driving the current wave of energy consolidation?

Vito Sperduto: At the end of ’23, and certainly as we’ve come into this year, we saw a lot of green shoots in terms of M&A deals. The energy sector was leading the way. We’ve seen some blockbuster deals like Exxon-Pioneer.

Tim Perry: The last time we saw this level of M&A was a generation ago, around 2000. But now it’s for different reasons. What you’re seeing is that the shale revolution is in the later innings, if you will. As a result, there’s a real desire for tier one inventory, and there’s not that much of it left.

Nick Woodruff: The material growth phase is largely over in our sector. Now we’re in a low to no-growth business model, and operators and public companies are chasing cost of supply and access to capital. Those two premises are really driving the consolidation wave.

“The material growth phase is largely over in our sector. Now we’re in a low to no-growth business model.”

Nick Woodruff, Managing Director, Global Energy

Perry: What we’re hearing from institutional investors is, frankly, they want fewer energy companies. The larger companies tend to trade at higher multiples and can usually do accretive deals of buying smaller companies. That’s another driver.

Woodruff: Besides Exxon-Pioneer, we’ve seen Chevron trying to chase some international assets with Hess. In the gas world, Chesapeake and Southwestern are combining and creating a bigger and better business. It’s not just trying to access more reserves and resource: some producers are trying to vertically integrate and reduce the cost structure like EQT did with Equitrans.

How do energy valuations stand at present?

Perry: If you look at the valuation to forward EBITDA ratio for this sector, it’s around five to six times. That compares to the mid to high teens for the overall S&P 500.

Also, if you look at yields right now for the sector overall, it’s in the low double digits – call it 12 to 14% for many companies – whereas the S&P500 is about half that.

What’s happened is that the demand forecast for oil and natural gas has changed pretty dramatically. This is causing some people to realign their commodity forecast. It feels like the energy sector right now is very cheap on valuations.

Sperduto: I think investors and corporates alike are taking a closer look at the energy sector and seeing some value there.

“Investors and corporates alike are taking a closer look at the energy sector and seeing some value there.”

Vito Sperduto, Head of RBC Capital Markets U.S.

How do public and private markets compare?

Woodruff: Private opportunities in quality companies seem to be around $3m to $5m per undeveloped location, while in public opportunities, it’s $1m to $2m.

What are the factors weighing on boards as they consider potential deals?

Woodruff: Several years ago, it used to be, how do I get leverage down in a low commodity price environment? We had to create joint ventures and different structures to accomplish that, as well as asset sales.

Now we’ve pivoted. Most of the conversations with boards and C-suites is around, how do we build a durable business, with a reinvestment rate that competes in the marketplace in years three, four, and five?

Perry: For a long period, oil has been in this $65 to $85 range. And that’s a really good range to do transactions. When oil gets either real high or real low, it’s very difficult to make transactions work in the sector.

“For a long period, oil has been in this $65 to $85 range. And that’s a really good range to do transactions.”

Tim Perry, Vice Chairman, Global Energy

Woodruff: I’ll coin it as the Goldilocks zone. The zone is $60 to $80 for oil and $3 to $4 for natural gas. That’s where we can get in the money, development drilling, and sellers feel like they’re getting value for their undeveloped potential.

Our Experts

Tim Perry
Tim Perry
Vice Chairman, Global Energy
Nick Woodruff
Nick Woodruff
Managing Director, Global Energy
Vito Sperduto
Vito Sperduto
Head of RBC Capital Markets U.S.

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