Independents should be looking for operational efficiencies through structurally beneficial consolidations. Only so much cost can be wrung out of a company’s operations without turning into a game of attrition. Yet over 2021, M&A deals focused mostly on purchasing assets: acquisitions of proved and unproved properties represented 65% of the total capital expenditures in the year and the highest level of acquisition capital expenditures since our study began in 2017.
Another benefit of consolidation is acquiring much-needed talent. Overall, operators are losing people, which may delight some boards and CEOs in the short term as labor costs decline. However, the subsector is struggling to keep workers with specialized, industry-specific skill sets, like in production revenue accounting, and that will ultimately hinder its ability to thrive in the years ahead.
Further, companies are finding that many of their systems and technologies are out of date and do not provide the data needed to keep up in areas such as tax and finance, ESG reporting, and supply chain and procurement. For example, in a 2022 EY Tax and Finance Operations survey, 74% of oil and gas companies mentioned they have plans to either do a major ERP upgrade or look into keeping fewer ERP instances in the next two years.
With scarce resources in a persistent cost-cutting environment, the fight for investment internally becomes more cutthroat, and innovation suffers. This is particularly problematic because deploying digital technology and data analytics to improve asset and operational performance is imperative. Consolidation immediately infuses a stronger entity with scale, new ideas and, hopefully, capital for accretive bolt-on or larger core acquisitions.