Last year was lackluster for oil and gas mergers and acquisitions, but some dealmakers are optimistic that 2025 will shine brighter.
Rising energy demand and a more favorable regulatory environment are expected to fuel an uptick in dealmaking, especially for non-core divestitures from recent megadeals, smaller transactions and the midstream space.
In the latest notable deal, oil and gas exploration and production (E&P) company Diamondback Energy said on Tuesday it will acquire certain assets of Double Eagle for $4.08 billion from growth capital firm EnCap Investments, continuing efforts to expand its footprint in the oil-rich Permian Basin.
The E&P company also committed to disposing of at least $1.5 billion of non-core assets to lower its net debt to $10 billion, following its $26 billion purchase of Endeavor Energy Partners last year, which made it the third-largest oil and gas producer in the Permian Basin.
More non-core divestitures are expected this year following a consolidation wave among upstream majors, and they could drive a rise in deal flow.
Consolidation wave fostering smaller deals
The past two years saw a handful of megadeals launched by the biggest E&P companies to scale their operations in the Permian Basin, including ExxonMobil’s purchase of Pioneer Natural Resources for nearly $60 billion, Chevron’s $53 billion purchase of Hess and Diamondback Energy’s $26 billion acquisition of Endeavor Energy.
After closing the deals, these behemoths often assess the pro forma business and find non-core assets to divest, said JP Hanson, the global head of Houlihan Lokey’s oil and gas group.
“In every period of large consolidation like we’ve just experienced, typically 18 months later, there’s a period of divestitures as the pro forma companies figure out which assets they acquired are core and which are non-core,” Hanson said. “There undoubtedly are assets in those acquiring companies’ portfolios that are valuable but simply not going to attract their further capital investment, and those assets will be brought to market.”
Some, though, expect the process to take longer.
These companies typically spend 18 to 24 months on the synergy analysis, said Phil Haines, a partner at law firm Hunton Andrews Kurth.
“We’re still waiting on some of these companies to get through that initial synergy phase,” he said, adding that he expects to see a series of divestitures in 2026.
Oil and gas companies inked 191 closed and announced M&A deals in 2024, marking the lowest annual deal count in a decade. But a torrent of outsized transactions drove up the aggregated deal value to $141.04 billion, above the average of the last decade, according to PitchBook data.
That trend is poised to reverse, given the anticipation of accelerated deal activity involving midstream companies and non-core assets.
There will be more mid-sized deals between $100 million and $200 million, a far cry from the billion-dollar colossus of the previous years, according to Carl von Merz, the head of Hunton Andrews Kurth’s US oil and gas practice.
He said there are fewer outsized targets for grabs, particularly upstream, following the flurry of large deals in the last few years.
Any ramp-up in oil and gas production as a result of new policy changes will also lead to more demand for midstream assets connecting natural gas supply basins to refineries and export markets, potentially triggering a wave of midstream M&A.
“The midstream companies have started to become attractive targets because now you have a demand to move gas to these new processing facilities,” von Merz said.
He added that he is hopeful some private equity firms can take advantage of this trend to exit their long-held midstream investments.
The industry has been experiencing an inventory glut: About 71% of PE-backed oil and gas assets were acquired before 2020, according to PitchBook data.
Roadblocks remain in place
Despite the optimistic outlook, dealmakers highlighted some barriers that remain in place, preventing M&A activity from gaining significant momentum.
Haines noted that elevated interest rates and the disconnect in valuation expectations between buyers and sellers have been holding back PE investments in oil and gas.
“There were companies that are on the borderline of a good deal, a good asset, a good runway, but just can’t get financed,” he said.
Haines added that deal activity remains slow as sellers are not under pressure to close deals and would rather wait for better valuations.
“Until you start getting a run of deals, I don’t think you will see a frenzied market where people are racing to get everything done immediately because they know someone will swoop the target.”
Featured image by Olga Rolenko/Getty Images
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