Consolidation seen as key theme for oil and gas sector in 2025 - Wolfe Research

Investing.com - Merger activity is anticipated to be a key theme for the oil and gas sector in 2025 as companies push to rein in costs and expand inventories, according to analysts at Wolfe Research.

Dealmaking in the oil and gas sector has risen in prior years, as many companies race to take advantage of recently increased cash flows from profits. According to a report from Ernst & Young released in August, top energy players spent $49.2 billion on mergers and acquisitions in 2023, up from $31.4 billion in 2022.

Acquisition costs at Chevron (NYSE:CVX ), in particular, came in $10.6 billion following a $6.3 billion move to purchase oil exploration and production group PDC Energy (NASDAQ:PDCE ), the Ernst & Young report noted. Chevron has also announced a plan to buy oil producer Hess (NYSE:HES ) for $53 billion, although a legal disagreement means the deal will likely not be completed until mid-2025.

Elsewhere, Exxon Mobil (NYSE:XOM ) finalized its $60 billion takeover of Pioneer Natural Resources (NYSE:PXD ) last May.

Ernst & Young predicted that the consolidation activity would extend over the rest of 2024 and into the current year, particularly through mega deals.

In a note to clients, the Wolfe Research analysts led by Doug Leggate said this consolidation is being driven by competition for "relevance" in a "fragmented oil sector polarized by scale." A decision by OPEC+ to delay the start of planned oil output rises by three months until April also means that "value continues to be at the pleasure" of the oil group, the Wolfe Research analysts argued.

"With top line growth an unacceptable strategy in the eyes of investors given the weight of spare capacity held by OPEC+, we see free cashflow growth dependency shifting to cost reduction with inventory expansion the second variable that can drive multiple expansion," the analysts said.

"In our view this keeps consolidation front [and] center as a key theme for the year ahead," they added -- although they flagged that "the practical headwind of a new generation of [small- to medium-] cap management teams and no obvious corporate distress from a balance sheet perspective may reduce the list of 'willing sellers.'"

As a result, those firms who have already used consolidation to secure and address "asset depth" and gain a "line of sight" into how planned cost synergies will be executed could be in advantageous position, they said.

(Reuters contributed reporting.)

Source: Investing.com