The oil and gas industry, a cornerstone of the global economy, has historically utilized mergers and acquisitions (M&A) as essential strategies for achieving strategic growth, enhancing operational efficiency and facilitating sector consolidation.
Consider M&A in the 2010s, when the shale revolution in the United States significantly impacted the global energy landscape by increasing oil and gas supply and introducing notable price volatility. This period, defined by fluctuating oil prices, increased regulatory pressures and a shift towards sustainable energy, crucially influenced M&A strategies within the sector. Companies focused on acquiring shale assets and optimizing their portfolios for greater cost efficiency and operational excellence. The era also witnessed a surge in partnerships and joint ventures as methods to share the development risks and costs of unconventional resources.
Building on these developments, the late 2010s to early 2020s marked a transformative era toward a low-carbon future, propelled by growing concerns about climate change and the necessity for a transition to a low-carbon economy. This new direction saw a significant shift in investor and stakeholder focus on sustainability, along with environmental, social and governance (ESG) factors. M&A activities within the industry began to heavily favor renewable energy, clean technologies and opportunities conducive to the energy transition. Traditional oil and gas companies, adapting to these changes, started to diversify their energy mix by acquiring or investing in renewable energy assets, electric vehicle infrastructure and other green technologies. This strategic pivot aims to align the sector with a more sustainable energy future, illustrating the industry’s evolving response to global energy demands and environmental imperatives.
Factors Influencing M&A Today
While resources and ESG continue to impact M&A today, intertwining technological, economic, geopolitical, and financial considerations also play a significant role. Technological innovation stands as a pivotal element, where advancements not only enhance production capabilities but also offer strategic advantages in a fiercely competitive market, prompting acquirers to target companies at the forefront of tech development. Concurrently, price volatility in oil and gas markets plays a significant role; sharp declines in prices can lead to opportunities for acquiring distressed assets at lower costs, whereas high prices might spur M&A activities as companies seek to leverage favorable market conditions.
Geopolitical factors further complicate the landscape, where international events and policy shifts can either deter or encourage investment, especially affecting cross-border deals with heightened sensitivity. Financial motivations, including the allure of favorable lending conditions, access to capital and debt markets, portfolio diversification and bolstered investor confidence, also drive exploration and production (E&P) companies toward consolidation.
Consider the example of Diamondback Energy and Endeavor Energy Resources. These two companies are on the brink of sealing a landmark merger deal, with a valuation close to $25 billion, split between cash and stock options. This strategic move is designed to forge a powerhouse in the oil and gas sector, boasting a combined worth surpassing $50 billion. By merging, they’re set to emerge as the premier pure-play oil producer in the Permian Basin, claiming the spot as the third-largest producer in the region, just behind industry giants Exxon Mobil and Chevron.
Exxon Mobil’s purchase of Pioneer Natural Resources, valued at $59.5 billion, is a major move that puts Exxon at the forefront of oil production in the Permian Basin, America’s richest oil field. This deal, done entirely with Exxon’s stock, is great for both companies’ shareholders and combines the best of both teams. It uses Exxon’s financial strength and high stock value to boost oil production and push forward projects to capture carbon and cut emissions. This merger is expected to increase Exxon’s oil production to 1.3 million barrels a day by 2023, with an aim of 2 million by 2027.
The Modern M&A Challenge
There are several strategic motivations behind mergers and acquisitions in the oil and gas sector. However, without a clear plan for integrating technology, these efforts can fail. PwC’s global M&A trends report emphasizes that successful integration requires the alignment of digital systems and processes with the long-term goals of the newly merged company. This strategic planning is essential for navigating the challenges of combining IT infrastructures and data systems, ensuring that the unified company can effectively utilize AI and digital technologies to improve performance and create more value.
5 Effective Steps to Scale and Adjust Upstream Oil and Gas Software for M&A
To effectively address the complexities of digital scaling within the context of mergers and acquisitions, organizations can follow these five strategic steps:
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Perform a comprehensive digital assessment.
Before M&A can even begin, it’s essential for all companies involved to conduct an extensive assessment of their software systems and digital capabilities. This review should identify any integration challenges that need attention, especially in security, infrastructure and employee skills.
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Create an integration road map.
Another step to consider before M&A is the development of a detailed and practical integration roadmap. This roadmap should outline all the required steps to successfully blend the digital ecosystems of all companies involved. At the very least, the roadmap should include a timeline, specific and achievable milestones, and key performance indicators to track progress.
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Ensure data integration and governance.
During M&A, data structures must align to ensure seamless integration. The alignment process involves finding any incompatibilities between the data systems of the companies and overcoming those issues by using data integration technologies. A data governance framework must also be established to control data quality, security, standards and more.
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Choose scalable software.
There’s no point in sticking to outdated software that makes scalability harder than it should be. When companies prioritize agile and scalable software solutions, such as cloud-based options and software-as-a-service models, the benefits include faster integration with existing systems and easier scalability for future growth.
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Establish effective collaboration.
When the M&A process begins, it’s important to nurture healthy communication and collaboration among all teams responsible for digitalization. Effective communication channels will keep all the stakeholders informed and make it easier to align strategies, address any integration challenges, and complete the digital transformation in a timely manner.
Despite the myriad external factors and technological scaling challenges that can impact mergers and acquisitions, companies have a pathway to success. By undertaking a meticulous audit of their digital and technological assets, developing a comprehensive integration roadmap, establishing a robust data governance framework, adopting scalable software solutions, and fostering effective communication across teams, firms can navigate the complexities of M&A with confidence. This strategic approach not only addresses potential obstacles but also positions companies to capitalize on opportunities for growth and innovation in the evolving landscape of the oil and gas industry.
Vince Dawkins, president and CEO of Enertia Software, has worked with industry-leading organizations, and he has been integral in developing the Enertia application into a resource used by over 200 leaders in the upstream oil and gas industry.
