In a shifting landscape, do you stand your ground or leap forward? In a shifting landscape, do you stand your ground or leap forward?

By John Hartung

EY Global Oil & Gas Strategy and Transactions Leader and Energy Market Leader, EY-Parthenon

Ace consultant across the energy value chain industry. An expert in servicing clients with in-depth industry knowledge.

13 minute read 12 Feb 2020

The industry and its investors are re-examining the value of oil and gas assets as a shift to low/no-carbon energy approaches. 

2019 was a year of exploration in the oil and gas industry, but much of it didn’t involve oil or gas. Instead, the industry and its investors searched to define the industry’s role and the value of its assets in the face of the coming transition to low-carbon and no-carbon energy.

A global consensus is forming among world leaders and citizens that climate action is necessary, and the push to decarbonize energy is pervasive and prominent. However, the current pressure has yet to manifest in reduced oil consumption. Oil demand increased by 1 million barrels per day in 2019 and is expected to increase by another 1.2 million barrels per day in 2020.

Our Fueling the Future project examines the role of oil and gas in various energy transition scenarios, reflecting a wide range of outcomes with respect to vehicle electrification and conversion of the power system to wind and solar energy and away from fossil fuels. Overall, we see returns that support continued investment in the sector and healthy M&A activity.

Disruption and transactions will go hand in hand as companies define their place in a new market landscape. As the energy transition takes shape, the timing and extent of peak oil demand and the ongoing role for natural gas should become better defined.

Aerial view at dusk of oil refinery bangkok thailand
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Chapter 1


Capital-raising was strong in 2019, and alternative funding sources, such as private equity and infrastructure funds, are gaining prominence.

Capital raised by oil and gas companies grew 7% to US$617.4 billion in 2019. Debt (loans and bonds) continues to account for a large portion (92%) of the capital raised, with companies more typically generating equity through internal cash flows. 2019 saw some of the largest financing deals ever, including Occidental’s US$47 billion of debt secured to fund its acquisition of Anadarko and Saudi Aramco’s US$29.4 billion IPO, reportedly the largest ever.

While the value of capital raised was at a five-year high, the volume of fundraisings (1,324) was down 10% annually, continuing the downward trend of recent years. Despite the positive aggregate capital activities, this highlights that conditions are much more challenging for some companies and in some segments of the oil and gas market.

Financial stress in the US upstream is growing, as evidenced by rising bankruptcies, defaults and asset write-downs. Forty-six oil and gas companies in the US filed for bankruptcy in 2019, up from 31 in 2018. More bankruptcies may follow as companies face mounting debt maturities. According to Moody’s Investors Service, oil and gas companies in North America have more than US$200 billion of debt maturing over the coming four years, with more than US$40 billion expected to mature in 2020.

Similarly, low profitability and high debt continue to constrain the capital of many oilfield services (OFS) companies. OFS players are moving away from building capacity to asset-light and technology-driven models to create more value and greater returns for shareholders.

The need for new capital is driving consolidation in the oil and gas industry, and alternative funding sources are gaining prominence. Private equity (PE) and infrastructure funds are becoming important sources of capital. Oil and gas producers are also exploring creative ways to raise capital, such as asset-backed securities related to wells or joint ventures, including farmouts and “DrillCo” transactions in which an investor funds drilling costs in exchange for a share in a lease or well.

Oil and gas companies are facing dual pressure from investors to deliver superior returns and future-proof their businesses amid the energy transition. Despite growing consensus on the need for urgent and bold steps to mitigate climate change, new technologies are not mature or scalable enough to immediately displace the oil and gas volumes that are consumed today.

Although oil and gas projects are likely to remain competitive with returns on alternative energy investments, it is becoming increasingly important for oil and gas companies to position themselves to the investment community in the context of the energy transition.

Companies have responded to the changing energy landscape by shifting their capital allocation strategies; in particular, they have increased investment in downstream businesses (such as chemicals and power) and reduced relative investment in the upstream segment. Oil majors are also investing in cleaner energy forms, such as natural gas and renewable energy.

This trend is expected to continue, as returns on oil and gas projects are likely to remain competitive with returns on alternative energy investments. However, there is growing pressure on investment banks and PE players to make climate-conscious lending or investment decisions. Energy transition readiness is also closely tied to equity returns in oil and gas. Therefore, it is becoming increasingly important for oil and gas companies to position themselves to the investment community in the context of the energy transition.

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Chapter 2


Stable oil prices have boosted confidence, but the majors in particular are grappling with stakeholder pressure around emissions.

Compared to the volatility of 2014–16, the industry has seen a stable oil price environment, typically US$60 to US$70 per barrel. This has boosted confidence, as seen in the continuing upstream trend of mid-market corporates buying assets from the oil majors in the mature basins and implementing buy-and-build strategies. The value proposition is to reduce costs while extending field production life.

But, against that backdrop of reasonably stable prices, the industry faces the relatively new challenge of ever-increasing stakeholder pressure around carbon emissions. Gas is the transitional fuel of choice but comes with increased investment risk, as more infrastructure is typically required to deliver gas into localized markets exposed to price uncertainty and demand risk.

Beyond gas, the oil majors in particular are grappling with investments in renewables, electric vehicles and battery technology. They are considering if and how they transition from being oil companies to being energy companies and what it would mean for capital allocation. They must balance the relative scale, risk and returns of their investments and acquisitions across their entire portfolios.

The oil majors are grappling with investments in renewables, electric vehicles and battery technology. They are considering if and how they transition from being oil companies to being energy companies.

Another trend is the continued drive for integration with companies expanding further downstream into refining and chemicals to diversify risk. The national oil companies (NOCs), supported by their host governments, are continuing to diversify away from upstream production by investing further down the hydrocarbon value chain. The NOCs often do this in joint ventures with the international oil companies (IOCs).

The IOCs also see downstream integration as a way of securing positions in end markets while reducing risk and earnings volatility and potentially increasing the value of their businesses as the sum of the integrated parts. Maximizing the uses of hydrocarbons — using chemical processing rather than just burning them — is one step on the path to reduce carbon emissions.

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Chapter 3


Economic fundamentals remained robust in 2019, but commodity markets were unsettled in part due to concerns over long-term demand.

Upstream deal value was up by 17.6% to US$160.5 billion, but the increase was due to Occidental’s US$57 billion acquisition of Anadarko. Excluding that transaction, total global deal value decreased 24.2%. Total deal count declined by more than 20%. For the fifth year running, the US led the way, with 60% of total global deal value.

Economic fundamentals remained robust in 2019, and oil prices were relatively stable, fluctuating between US$52 to US$64 per barrel for WTI crude. For natural gas, the news was worse. Supply from the Permian Basin continues to push North American prices lower, down 18% in 2019.

A remarkable feature emerging in the oil market is price stability in the face of potentially catastrophic supply disruption. In early September, a large oil processing facility in the Middle East sustained damage in a drone attack, and 5% of the world’s oil supply was temporarily offline — yet there was minimal sustained impact on oil prices.

Concerns over long-term demand and an increased focus on environmental, social and governance (ESG) considerations have limited M&A activity and depressed equity and asset valuations. US exploration and production companies saw a year-over-year decline of more than 25% in equity valuations. This has created opportunities for more resilient players to acquire assets at attractive valuations.

Equity valuations


Decrease in valuation for US exploration and production firms in 2019.

Large independents and majors are continuing to realign portfolios by divesting non-core assets across the globe. For example, ExxonMobil announced a multibillion-dollar divestment program in upstream assets while focusing on capital growth plans in Guyana, US-Permian and Mozambique. Similarly, BP is divesting upstream assets in Alaska, the North Sea and US onshore.

While PE firms invested over US$39.6 billion and divested over US$31.9 billion globally from 2017–19, management teams struggled to generate growth by either providing cash returns and dividends or an exit option. In the US, PE explored nontraditional financing methods through DrillCo transactions for guaranteed returns. Outside the US, Europe continued to see a trend of PE-backed independents acquiring portfolios primarily from majors and large independents divesting non-core assets.

Going forward, we expect to see several PE firms that held on to North Sea investments through the recovery period explore opportunities to exit as they look to return capital to investors. PE-backed players will need to consider exit options carefully; market sentiment for exit via IPOs is challenging, with headwinds from the longer-term oil and gas outlook and increasing public pressures to tackle climate change.

Indeed, a greater focus on ESG and energy transition will continue to be a key investor theme for how capital is deployed in 2020. Continued portfolio rationalization for majors will lead to opportunities for smaller independents and PE-backed entities to make deals, as well as to access new asset portfolios.

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Chapter 4


Private equity and other fund investments continued to increase. LNG transactions fell due to changing commercial models.

As predicted in our 2018 review, midstream transaction value and volume cooled off in 2019, as a major wave of corporate simplifications was completed in 2018. Globally, only one midstream transaction was valued at greater than US$10 billion, and only 20 transactions were valued above US$1 billion. North America continued to dominate the midstream transactions: 75% of the total deal value and 16 of the top 20 transactions by value were in the US and Canada.

Two themes from midstream transactions emerged in 2019. The first was continued PE and infrastructure fund (IFF) investment, albeit with more capital discipline. Half of the top 10 deals had PE or IFF buyers. Debt reduction remains a key priority for midstream players, and PE and IFF buyers can provide needed capital while seeking stable, reliable returns. Outside the US, IFF buyers, as well as pension funds, continue to invest in natural gas infrastructure in emerging countries, such as India and Brazil.

Midstream activity


of total deal value took place in the US and Canada.

The second theme involved declining LNG transactions amid a changing environment. Significant transformations in the LNG business include a diversifying mix of buyers and sellers, changing contract terms and changing demand drivers. This ambiguity about future commercial models was reflected in 2019 LNG transactions, which declined 28% and 10% in value and volume, respectively.

Looking ahead, we expect midstream companies to remain focused on disciplined capital allocation. Globally, PE and IFFs are likely to continue to be the driving force in M&A. Companies will be on the lookout for low-cost capital as they continue to restructure their businesses and focus on completing large existing projects to improve cash flows to fund new projects or execute buybacks.

And, as recently completed midstream projects start generating revenue, the sector’s EBITDA is expected to increase 5% to 7% through the second half of 2020. This could help companies deleverage and return to debt financing to fund strategic expansions.

We expect that future new project LNG final investment decisions may be challenged by a soft gas market, depressed commodity prices (2019 natural gas prices in the US were the lowest in the past three years), an increasingly competitive international gas market and concerns surrounding significant cost overruns during construction.

Finally, the future of energy and its effect on project returns will play a key role in capital decisions, including transaction activity. If work toward Paris Agreement goals leads to significant decarbonization, returns for LNG liquefaction are expected to decline to 9.5% in North America (compared with a projected baseline demand of 12.1% without such decarbonization).

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Chapter 5


Except for one big deal, downstream activity was quiet. However, interest in developing regions continues to rise.

Outside of Saudi Aramco’s acquisition of SABIC, valued at US$69.1 billion, downstream deal activity was relatively quiet in 2019, with deal value down 31% and volume down 10%. In the few deals that were announced, creative transaction structures were often required. For instance, the SABIC deal included assurances in the form of contractual offtaker arrangements.

In the US refining space, the lull in 2019 was certainly not due to a lack of effort: seven different assets, or nearly 5% of US capacity, were publicly announced as available for sale. In our view, two factors exacerbated the divide between buyers and sellers: a lack of consensus on the magnitude and longevity of International Maritime Organization tailwinds and the increasing role of ESG considerations.

Downstream deal value in North America and Europe

US$24 billion

Down from US$80 billion in 2018.

In 2020, we expect the major oil companies to continue to invest in key developing regions, including India, with joint ventures becoming more common. For example, SOCAR and BP are exploring a possible petrochemicals joint venture in Turkey. We also expect continuing interest from large independents, trading houses and convenience retail specialists to acquire and consolidate the non-core retail assets of the major oil companies and smaller independents.

In other trends, PE, particularly in storage and transportation, may see a flurry of activity as firms are forced to rebalance their portfolios and more clearly articulate their views and strategies on the energy transition versus the attractive economics and risk profile associated with infrastructure assets. Ultimately, the restoration of normal yield levels in the public markets will require resurrecting investor confidence levels on the predictability of consistent tax-efficient distributions.

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Chapter 6

Oilfield services

OFS companies continued to grapple with stagnant demand for services, oversupply and the legacy of a fragmented marketplace.

In OFS, 2019 saw a continued decline in deal volume and deal value. Deal volume was 267, 20% lower than 2018, and deal value was US$20 billion, 27% lower. These trends highlight a dearth of activity at the lower end of the market.

OFS companies continued to adjust their portfolios to align with customer portfolio rationalizations. Additionally, some of the large and midsized companies are beginning to scrutinize their portfolios from a “returns” lens and are ready to shed assets that do not meet threshold returns. This is a shift from their traditional focus on expanding market share even at the cost of reduced pricing power and returns.

OFS deals


Transactions in 2019, a decline of 20% from 2018.

Many OFS companies are adding complementary products and services to expand the breadth of their offerings and/or strengthen their capability to offer integrated solutions. In 2019, financially sound companies also took advantage of reasonably priced assets, especially capital-intensive ones, that distressed companies were looking to off-load to reduce their debt. We expect this trend to continue as companies refocus their portfolios.

We also expect the OFS sector to become more consolidated as the largest players build capabilities to offer integrated or bundled products and services via inorganic growth, while smaller and mid-cap players merge to create economies of scale.

Cost pressure and demand from customers have pushed OFS companies to digitize. OFS transactions in 2019 reflected that push, and several large and midsized OFS companies across the value chain strengthened their digital capabilities via a mix of joint ventures, partnerships and acquisitions. These transactions were mainly aimed at improving efficiencies in their product and service delivery.

Successful companies will continue to reshape their business models with technology at the center. Today, OFS companies typically partner with established technology companies. Over time though, we expect that OFS companies will acquire small technology startups and then work to integrate and adapt that technology to the oil and gas industry.

A likely future transaction theme for the OFS sector will be energy transition. OFS companies are likely to take gradual steps to adjust their portfolios, following the footsteps of existing customers and balancing risks and rewards in a capital-constrained environment. Companies are likely to consider venturing into businesses that leverage their core capabilities. For instance, offshore service providers have won some level of relief in mature basing, providing services to developers of wind projects.

How oil and gas transactions progressed in 2019

Listen as we discuss the transactions trends of 2019 and the deal outlook for 2020 across the subsectors.

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Capital-raising was robust for the oil and gas sector in 2019. M&A values were also strong thanks to a few megadeals. But, looming decarbonization was an undercurrent across the industry and is beginning to shape strategy and dealmaking.

About this article

By John Hartung

EY Global Oil & Gas Strategy and Transactions Leader and Energy Market Leader, EY-Parthenon

Ace consultant across the energy value chain industry. An expert in servicing clients with in-depth industry knowledge.