The Takeaway: A Q&A With J.P. Hanson on the State of Oil and Gas

So, 2024 was an interesting year within oil and gas. What was the biggest trend that you saw in the market?

That’s a really interesting question. This may seem obvious, but oil and gas is a highly cyclical industry. The cyclicality is a result of not only changes in commodity prices, but also in terms of operating business objectives and transaction activity. Historically, in terms of transaction type, there tend to be more asset-level deals than corporate-level deals, both in the U.S. and globally.

There is a specialized segment of upstream oil and gas M&A, which is known as asset acquisition and divestitures (A&D). These A&D deals represent transactions at the asset rather than the corporate level. When you look at the aggregate of both deal value and deal volume historically, A&D transactions typically make up more than 80% in any given year.

Historically, in any given year, the upstream oil and gas sector in the U.S. averages approximately 180 asset-level transactions, plus another approximately 60 upstream transactions outside the U.S. and approximately 50 transactions in the midstream sector. 2024 has been vastly different. The oil and gas industry experienced three quarters in a row of the highest aggregate deal value in a decade with some large standout corporate deals, such as Exxon’s acquisition of Pioneer Natural Resources; Chevron’s acquisition of Hess; ConocoPhillip’s acquisition of Marathon Resources; Eni’s acquisition of Neptune; and Harbour’s acquisition of Wintershall Dea, among others. However, in contrast, global transaction volume has been about 30% of the annual average. Such a low volume of deals is very much outside the norm. In 2024, A&D has been about 20% of aggregate deal value and less than 50% of deal volume. So, we’ve experienced a significant reduction in deal volume but a high spike in aggregate deal value. In my career, I have seen at least three of these types of cycles previously; it will most likely revert to the mean, but 2024 has been a bit of an anomaly.

Given the trends in oil and gas dealmaking that we’ve seen this year, what’s getting financial sponsors most excited about the transaction market right now?

I think from a sponsor perspective, there are two primary things, and it has to do with this cyclical nature of oil and gas.

Firstly, we’re finally coming out of what has been a very difficult fundraising period for private equity within oil and gas. That said, within the past six months, the tides have very much changed, and we’ve seen some large private equity funds be raised. One of the most dedicated industry private equity funds, EnCap, just closed a $6.5 billion fund; I understand it ended up oversubscribed at $6.8 billion. Quantum Energy Partners raised $10 billion in aggregate across three separate strategic funds. NGP just closed a $3.25 billion fund. Kayne Anderson is currently closing an oversubscribed energy fund, as well as other players such as Carnelian Energy Capital. So, we’ve finally seen the tides change as dedicated capital is returning to fund opportunities within the oil and gas industry.

Secondly, it’s kind of perfect timing for a financial sponsor to have fresh capital because, from a trend standpoint, typically, what happens on the back end of this high-value, low-volume M&A A&D cycle is that the surviving company post-M&A evaluates its pro forma portfolio of assets and determines which assets are noncore and are therefore not going to attract capital in their portfolio. Those are assets that are often very highly valuable to a private equity buyer/private equity portfolio company. This will result in raising the A&D transaction volume back to the annual average. As a result, within 2025 and carried into the next several years, I fully expect that we will see a return to the average when it comes to transaction volume, including a high volume of middle-market A&D transactions.

Private equity is perfectly suited now with this fresh capital to take advantage of this coming trend.

We’ve touched on what’s going on in the U.S., but within the global landscape, is the U.S. experiencing anything that’s different than what’s going on in the rest of the world? 

It is fairly different outside the U.S. Within the U.S., we have a more diverse oil and gas landscape, including from large integrated oil companies to specialized, sector-dedicated public independent upstream, midstream, and downstream companies, as well as private-equity-backed companies that are typically smaller. In the U.S., we don’t have a national oil company (NOC). In most other regions globally, including Latin America, Southeast Asia, China, India, the Middle East, Africa, Eastern Europe, and even certain countries in Western Europe, the oil and gas landscape is anchored by NOCs. For instance, some of the large NOCs include the likes of Saudi Aramco, Petrobras, PetroChina, Equinor, Petronas, and Qatar Energy, among many others. We simply don’t have that setup in the U.S.

As mentioned, in the U.S., we have a much wider range of large and small publicly traded companies, the likes of the majors such as ExxonMobil and Chevron, or the large independents such as EOG Resources, Oxy Petroleum, and ConocoPhillips, down to the small and mid-cap companies that are publicly traded (such as EQT, Permian Resources, Coterra), and then a thousand different private-equity-backed companies. 

While most regions globally open their oil and gas assets to development by majors or large independents, the universe of private-equity-backed companies is typically relatively smaller, and those are typically family-office or local private-equity-backed.

Outside of the U.S., aggregate transaction value and volume have generally maintained a state of play that is more in line with historical averages. However, there are select countries where political changes have created a difficult operating and transaction environment. For instance, the U.K. government has imposed a “profits levy” or tax of 78% against earnings of upstream oil and gas companies. In reaction, upstream companies have had to adjust their operating strategies and A&D priorities. As a result, one trend that has recently emerged is the establishment of joint ventures among both small and large-cap companies in an effort to balance U.K. North Sea production, development, and decommissioning capital expenditures in order to maintain profitability. Some examples of this are the recent JVs between Eni/Ithica Energy and Equinor/Shell.

There have already been a couple of joint ventures established (such as Equinor/Shell and ENI/Ithaca) in an effort to gain scale and create optionality regarding production, capital expenditures for both field development and decommissioning, as well as cost management to maximize profitability in response to the profits tax (or EPL). Additionally, there are other conversations ongoing among other similarly situated U.K. North Sea operators regarding potential JVs to achieve scale. Elsewhere in the world, we’ve recently seen a big pickup in interest and activity in Africa, both onshore and offshore across the continent. I think that will continue into 2025 and beyond as more and more discoveries are made. In order to maximize development and related profits, many African countries are currently welcoming outside investment.

There’s also been a recent pickup in Southeast Asia (especially with respect to recent natural gas discoveries) as well as in South America—particularly, for instance, in Guyana, with the large Staebrok (or Liza) discovery and development operated by ExxonMobil and its partners, including Hess.

Now that we’ve wrapped up 2024 and have kicked off 2025, what’s your outlook for activity this year? 

I think the biggest trend will be a reversion to more typical asset-focused A&D transactions with higher transaction volume and, particularly, a reversion to the annual average within the middle market, in which we at Houlihan Lokey specialize.

The re-emergence of a typically active A&D market is still in the early stages, but A&D activity is beginning to pick up in the U.S., as evidenced by recent divestitures from companies like Apache, Oxy, ExxonMobil, ConocoPhillips, and Chevron. I believe that in 2025, this more active A&D market trend will continue to build, with further activity and the deployment of recently raised private equity capital in support.

Based on historical trend cycles, I believe that’s a trend that can last several years, and it will not be isolated just to the U.S. This really is a global trend, as we’re seeing opportunities now emerge in Africa, Southeast Asia, South America, and even Europe, in addition to the U.S. and Canada. 

So, what’s The Takeaway?

There are a lot of reasons to be optimistic about the oil and gas industry, particularly both in the upstream and midstream sectors. From an investor standpoint within oil and gas, there is a strong cash-on-cash return that is attracting capital back to the industry, and given the current stakeholder return-focused mindset by management teams, I believe we will experience longevity. As the A&D trend reverts to the annual average, for private equity investors, there is a real reason to be encouraged about finding good opportunities to deploy capital and get a meaningful return on that capital, particularly within the upcoming three-to-five-year window.