#United States #New York #Oil Industry #Ernst Young #Mergers & Acquisitions

Major Changes in the U.S. Oil and Gas Industry

The U.S. oil and gas industry is no stranger to volatility, yet recent trends indicate a monumental shift fuelled by mergers and acquisitions (M&A). According to the latest US Oil and Gas Reserves, Production and ESG Benchmarking Study conducted by Ernst & Young LLP (EY US), the number of the largest publicly traded exploration and production companies has dwindled from 50 to just 40. This transformation not only reduces competition but also signifies a deeper change in how the sector is approaching growth in an era marked by fiscal caution, strategic investment, and heightened operational efficiency.

Key Findings of the EY Study

The study highlights dramatic developments, revealing that these 40 companies now account for approximately 41% of U.S. oil and gas production as of 2024, maintaining a consistent proportion despite the reduced company roster. But what's driving this shake-up? A staggering 331% increase in M&A activity was reported, culminating in a total of $206.6 billion in deals—the most notable of which include five megadeals exceeding $10 billion.

Pat Jelinek, EY’s leader of Oil, Gas and Chemicals in the Americas, emphasized that this moment could redefine the U.S. upstream sector. The consolidation of fewer, yet more financially robust and efficient players is a sign of the industry not merely surviving the challenges it faces, but instead gearing up to lead the future trajectory of American energy.

Capital Reallocation Trends

Interestingly, the study also illustrates significant shifts in capital allocation. After peaking in 2022, capital returned to shareholders through methods such as dividends and share repurchases has steadily declined, with funds being redirected towards strategic acquisitions instead. This strategy is evidenced by a sharp rise in the value of unproved properties, which saw an allocation increase from 18% in 2023 to 42% in 2024. This indicates a growing focus on future drilling potential, crucial for long-term sustainability and growth in oil and gas output.

In contrast, the capital used for acquiring proved reserves saw a 12% increase year-over-year, rising a remarkable 161% since 2020. As integrated companies show efficiency by paying an average of $20.89 per barrel of oil equivalent (BOE), this shift highlights a strong focus on owning assets that promise future production.

Challenges in Production Cost Management

Despite falling commodity prices and synergies expected from M&A, production costs per BOE saw a 1% rise in 2024, evoking concern over operational integration challenges that often emerge post-merger. Bruce On, a partner at EY-Parthenon, asserts that success now requires more than just asset offshoreing—there needs to be a formidable focus on integrating those assets effectively to create value. The rise in production costs often signals struggles during the early stages of post-merger integration.

Maintaining Resilience Through Discipline

While exploration and development costs have dipped by 7% year-over-year, it’s promising to note that the industry's ability to grow reserves remains strong, with production replacement rates exceeding 100%. This achievement reflects the capacities of companies even while they choose to decrease spending on traditional exploration methods. However, the recent 5% increase in oil reserves and 4% decline in gas reserves reflects the ongoing challenges faced by gas-heavy operators in navigating erratic pricing and market demands, emphasizing the importance of adaptability.

Moreover, as operational efficiency becomes more crucial amid uncertainties regarding supply and demand, enduring market dynamics, political tariffs, and geopolitical tensions, the emphasis for the leading oil and gas companies will be on strategic investment and effective capital discipline.

Conclusion

Ultimately, this EY study encapsulates a pivotal moment for the U.S. oil and gas industry. Not only does it illustrate a landscape marked by consolidation and strategic mergers, but it also encapsulates the essence of resilience and adaptability that will be required to thrive in a complex future. Those companies who can pivot quickly, invest wisely, and integrate effectively will likely become the vanguards of U.S. energy’s next chapter.