The pressure on upstream players to rapidly improve their financial performance puts the spotlight on corporate M&A transactions. Meeting investors’ expectations will require companies to get five things right. These imperatives take different flavors, depending on the deal profile.
The race to profitable growth is putting corporate deals back on the table
The upstream industry has an obligation to increase shareholder returns and fund capital programs organically. So far, industry efforts have failed to impress investors. Financial returns have not met expectations. The sector has been lagging the S&P 500 index for several years (see Figure 1).
Companies with higher cash flow have significantly outperformed the sector average. The composition of a company’s asset portfolio plays a key role in cash flow, since different asset classes have different cash profiles based on full-cycle margins and time-to-first-production, as shown in Figure 2. Forward-thinking upstream companies acknowledge that realigning their asset portfolios is a powerful way to rapidly improve performance. It’s no wonder that focus is turning to corporate M&A deals.
Companies with strong balance sheets and a willingness to invest opportunistically will enthusiastically pursue
M&A deals. Weaker companies will also feel obligated to pursue M&A opportunities—despite the fact that
oil price and equity market volatility, bid-ask spreads, and persistent debt burdens would, in other
circumstances, dissuade them from doing so. For them, joining forces is a way to quickly strengthen their
portfolios, alter their trajectories, and regain investors’ interest.
Successful integration means getting five things right
Any deal of material size will attract investors’ attention. Higher-premium, equity-dilutive, and cash-heavy
deals shine a spotlight on the magnitude of synergies and speed required to become cash accretive. Recent
corporate transactions illustrate this trend. Nearly 70 percent of announced synergies coming from cash-related
opportunities are to be captured in less than two years.1 A relentless focus on rapid
and aggressive value creation during post-M&A integration has become the norm and calls for companies to
achieve five imperatives:
Accelerate value capture. The sources of synergies in upstream M&A deals are varied and
come with different timelines. Leveraging forensic digital capabilities to accurately plan during the
pre-close phase of the deal will accelerate post-close value capture. Negative synergies due to increased
internal complexity are often overlooked. They need to be recognized early on. Rigorous tracking of value
captured post-close—with clear management oversight and accountability—is an absolute must.
Plan for the long-term multiplier effect early on. M&A deals in the upstream space
typically take one of three forms: an acquirer takes over another company and imposes its model; two
entities come together and take the best of what each company has to offer; or two entities come together,
re-invent the model and transform their way of working. Regardless of the M&A objective, an integrated
oil and gas entity should aim to achieve a level of performance that is greater than the sum of its parts.
That requires bringing together two sets of cultures and operating models. The integration strategy will
dictate the success of those efforts—and determine whether the combined entity operates as two companies or
as a reinvented enterprise that leapfrogs the competition.
Act on portfolio adjustments quickly. Large oil and gas transactions usually come with
non-core assets. Disposing of those as soon as possible, without distracting from integration activities,
can have a major impact on the deal’s profitability.
Manage integration choke points. Because the upstream sector of oil and gas lacks a track
record with large-scale deals, it can be difficult to anticipate the challenges ahead. A focus on day-one
readiness is key. But the complexities associated with organizational migration and IT integration, as well
as gradual attrition, are issues that will require planning and senior management attention over an extended
period of time.
Zealously manage culture harmonization. M&A deals are stressful to the organization.
This creates a significant risk in terms of loss of morale, confusion, and eventually attrition. Proactive
change management programs that preserve the strength of the workforce and integrate cultures are critical
to successfully executing an integration.
The investment objective of a specific upstream deal will drive the relative importance of these imperatives. The
table below (Figure 3) provides a heat map of the possible integration issues across three possible deal archetypes:
Two pure players (e.g. shale) come together. A global company acquires a pure player. And two global companies come
This representation of deal complexity by archetypes underlines the need for companies to craft an integration strategy on a case-by-case basis. There is no single roadmap or boilerplate approach. It is true that the M&A process follows a common script at a high level. But to create and sustain value required by more demanding shareholders, the specifics of a deal will require detailed attention to the sources of synergies, risks, and longer-term challenges.
It is hard to predict the number or timing of corporate transactions in the upstream industry. What is clear is that large deals will receive more scrutiny in terms of valuation and execution than before. The lack of muscle memory across the industry will make the M&A journey quite challenging. Lessons from recent transactions, even from other industries that go through M&A exercises regularly, will come in handy.
1 Accenture Strategy Energy corporate M&A deal analysis.