Driven by high operating free cash flow, the North American upstream market is expected to usher in a new wave of mergers and acquisitions (M&A), according to McKinsey & Co. analysis.
The firm analyzed historical cash flows and projected operational and financial performance for the leading 25 North American exploration and production (E&P) companies. Operating cash flows are projected to remain high, with levels of $70-90 billion in 2023 and $50-70 billion to 2027—even if oil prices drop to $65-70/bbl.
The E&Ps analyzed are expected to generate a total of $140-200 billion in operating cash flow in 2023. Operators are taking advantage of high cash flows. Industry debt load decreased by $25 billion from 2021 to 2022 and is forecast to fall by another $15-20 billion by 2027. With debt burden reduced, returning shareholder value will be priority, and McKinsey expects dividends to climb to $30-40 billion over the next year. McKinsey’s analysis also shows that only inorganic growth is unbounded going forward, suggesting that cash will be deployed through M&A.
“Even after these uses of cash have been exhausted, the industry is likely to remain cash-flow positive in 2023 and beyond, with a ‘war chest’ of $100-230 billion. The primary tool left in the corporate finance toolkit is deployment of cash through M&A,” said Tom Grace, partner, McKinsey & Co.
“A common refrain from industry veterans discussing M&A is, ‘You are either at the table, or you’re on it.’ This is a harsh reality, but companies with strong M&A capabilities and bold strategies often exit the cycle fully fed and healthy.”
Industry trends suggest that multiple M&A strategies are driving this next wave of consolidation. Basin consolidators will likely look to add scale and leverage operational advantages to achieve outsized returns. Integrators may seek to add assets in adjacent portions of the value chain to expand margins and increase resilience. The bold will probably use a portion of their cash stockpiles to seed businesses to reshape their portfolios and position for the energy transition, the firm said.
“The oil and gas industry is entering a period of unprecedented uncertainty characterized by the energy transition, evolving investor sentiment, and mounting energy security concerns. Now is not the time to bask in the glow of recent success. As in the past, successful industry players will work tirelessly to define and deliver a strategy rooted in sound M&A investments to accelerate their future growth and performance,” said Jeremy Brown, consultant, McKinsey & Co.
