The energy sector has recently seen an unprecedented spike in M&A activity. We spoke with Rebecca Fitz, a BCG partner and associate director, about how the top performers are creating value by selectively pursuing deals that strategically align with their portfolio and capital objectives.

Rebecca Fitz

Partner and Associate Director, Center for Energy Impact

Washington, DC

BCG: The energy sector has been a hotbed of M&A activity. What can you tell us about the contours of the record-breaking surge?

Rebecca Fitz: In 2023, total deal value in the energy sector reached nearly $400 billion, a 50% increase over 2022 levels. Dealmakers have stayed active in 2024. Through the end of April 2024, the value of announced deals had exceeded $150 billion, nearly double the value through the same period in 2023.

The oil and gas (O&G) subsector has led the charge, accounting for more than 70% of energy transactions during the past 16 months. The lion’s share of spending came from two major acquisitions, by ExxonMobil and Chevron. ExxonMobil completed its purchase of Pioneer. Chevron’s acquisition of Hess—close on the heels of its purchase of PDC Energy in the third quarter of 2023—remains subject to regulatory and other approvals. Excluding these megamergers, the O&G sector still saw a nearly 25% increase in transaction value year over year.
 
In 2024, the strong deal pipeline includes exploration and production deals involving US unconventional resources (such as in the Permian Basin) and international portfolios (such as Harbour Energy’s acquisition of Wintershall Dea). In addition, we’ve seen consolidation and strategic repositioning in the midstream sector and, most recently, significant O&G service sector acquisitions.

In which other energy subsectors are we seeing M&A momentum?

Other active subsectors include renewables and power and utilities (P&U). Among P&U companies, divestitures have dominated transaction activity, accounting for 68% of deals and 85% of deal value. North American utilities, for example, are actively managing their portfolios through divestitures. Over the past five years, the transaction value arising from their portfolio management has totaled $145 billion.

The recent surge throughout the energy sector builds on an already active period for dealmaking, with companies seeking to create value by reconfiguring their portfolios. BCG’s analysis of the dealmaking by the world’s 150 largest publicly listed energy companies found that 77% have pursued M&A or divestitures over the past five years. Of these active companies, two-thirds executed deals valued at more than $1 billion, and one-quarter completed transactions surpassing $5 billion.

What’s driving the increased activity?

Many companies are aiming to bolster their portfolios and reinforce their capital strategies in response to significant volatility in the energy market. They are also gearing up for the increased capital expenditure demands of the energy transition.

For companies focused on strategies for the energy transition, M&A can be crucial for achieving scale and efficiencies. And in the current environment of higher interest rates, deals can offer fresh capital injections to enhance financial stability. Considering how transactions can improve portfolio sustainability is a key component of an effective capital allocation program for the energy transition.

Amid such a surge in dealmaking, there are bound to be winners and losers. How are the winners maximizing value creation through M&A?

An ongoing BCG study of total shareholder return (TSR) in the energy sector from 2019 through 2023 provides insight into the answer. The analysis focuses on the 150 largest publicly listed energy companies I mentioned earlier, which are in the O&G, P&U, and green energy subsectors.¹ 1 Companies included in BCG’s Energy Value Creators study have a market capitalization exceeding $7 billion, trade at least 20% of their shares in public capital markets, and were publicly listed for the full five years covered. Chinese and Russian companies are excluded. Notes: 1 Companies included in BCG’s Energy Value Creators study have a market capitalization exceeding $7 billion, trade at least 20% of their shares in public capital markets, and were publicly listed for the full five years covered. Chinese and Russian companies are excluded.

We found a wide range of performance during the five-year period: the average annual TSR was approximately 27% for the top 25 performers, compared with approximately 10% for the rest of the companies studied.

Further analysis showed that deal activity appears to be instrumental in driving higher TSR performance. Intriguingly, the top TSR performers approach M&A and divestitures differently than their lower-performing peers. In a nutshell, they are extremely selective in their acquisitions, while balancing these efforts with divestitures and capital recycling. However, TSR dynamics play out somewhat differently in O&G versus P&U.

What are the leading O&G value creators doing differently?

The top TSR performers in O&G pursue targeted growth opportunities through M&A and then practice strong financial stewardship by divesting the non-core assets related to their acquisitions. To preserve balance sheet health, they fund their large deals primarily with equity. They also couple their larger deals with smaller, asset-level deals to optimize the portfolio. In combination, these strategies have resulted in their five-year annualized TSR being primarily driven by profit growth, despite flattening oil prices.

By contrast, lower TSR performers faced balance sheet stress after funding larger deals with cash or debt and taking a more reactive approach to divestitures. This has led to an increase in net debt, which was the main contributor to their underperformance in five-year annualized TSR.

What sets apart the top performers in the P&U subsector?

In P&U, the top TSR performers pursue fewer transactions overall. They completed 50% fewer acquisitions and 60% fewer divestitures than their lower-performing counterparts. Their opportunistic use of M&A promotes scale without impairing the balance sheet, while their focused approach to divestitures proactively recycles capital and optimizes portfolios. Five-year annualized TSR is mainly driven by the expansion of price-to-earnings multiples and the reduction of net debt, aided by divestitures and responsibly funded M&A.

On the other hand, lagging TSR performers were more reactive in their divestiture programs. Their underperformance in five-year annualized TSR resulted from the effects of rising costs on profitability, as well as the need to issue equity to deleverage.

Much of the divestiture activity in P&U has focused on efforts to narrow portfolios. During the past five years, six North American utilities publicly announced portfolio-narrowing divestitures, largely to sell unregulated businesses. Five of those companies outperformed the regional utilities index after the announcements.

When planning and executing divestitures, what can P&U and other companies do to minimize the costs of carving out a business?

The costs of carving out a business often undermine the economics of divestitures. Companies need to focus on these costs up front and manage them proactively throughout the carve-out process. BCG’s analysis of separation costs identified several imperatives that promote careful planning and execution. These start with gaining clarity on the motivation behind an asset sale as early as possible, so that strategy and deal teams can identify the right type of divestiture and potential acquirers. Companies should then set a plan for controlling costs and rigorously adhere to it. It is important to prioritize tackling stranded costs while addressing dis-synergies, in areas such as administrative and IT services costs, over the longer term.

What does BCG’s research and experience reveal about the success factors for M&A in the energy sector?

The analyses we’ve just discussed point to how critical it is to identify the right targets to pursue. Equally important is structuring the transaction effectively to protect the balance sheet. After the deal closes, we see that proactive capital recycling and portfolio management are essential to maintain TSR momentum.

BCG’s comprehensive study of the success factors that distinguish top-tier dealmakers identified two post-closing moves that are particularly relevant for energy companies.

First, realizing synergies is crucial for value creation. Although synergies are frequently used to make acquisitions viable, merely identifying them is insufficient. Our research reveals that over the past 15 years, buyers in public M&A deals have retained only about 50% of synergies; the rest tends to be factored into the purchase price, although this rate fluctuates with market conditions. Our studies repeatedly indicate that insufficient or unrealized synergies are among the main reasons why some deals are deemed failures.

Second, post-merger integration (PMI) design and execution are paramount for successful M&A outcomes. BCG’s study of deal success factors shows that poor planning or a lack of strategic fit contribute to the failure of 30% to 40% of deals. In nearly half of those unsuccessful transactions, inadequate or misguided PMI stood out as either among the root causes or the primary cause of the shortfall in value creation.

Take us a bit deeper into PMI. What should companies be thinking about to create value?

To succeed, PMI must achieve four fundamentally distinctive objectives:

• Maintain momentum in the ongoing businesses.
• Understand the value-creation and integration logic even before signing.
• Maximize and accelerate synergies and value creation.
• Build the organization and align the cultures to drive the new company forward.
• Use the combined capabilities to advance the company’s competitive position. 

The stakes are high for getting PMI right. For example, smaller or younger P&U companies using M&A to gain technology and talent need to design their integration approach carefully to avoid destroying value in the pursuit of synergies. These companies would benefit from applying a well-honed PMI approach across their serial transactions.

In the energy sector, M&A is fraught with risk. This is especially true for large transactions. Success hinges on meticulous preparation, addressing due diligence oversights, and managing post-merger challenges amid economic uncertainties.