Independent exploration and production (E&P) firms that fail to adjust to the energy transition face extinction before 2050, an analyst said today.
Mergers may “prolong the inevitable” for some of those companies, said Luke Parker, vice-president of Edinburgh-headquartered energy research and consultancy firm Wood Mackenzie.
But most are likely to have wound down before the second half of the century comes into view, Mr Parker said.
He did say that winding down would be a “strategic choice” for many, rather than an “unwitting oversight”.
Mr Parker also said this approach would be easier to adopt for private companies than publicly listed firms.
Bosses at UK-focused, private independents Zennor Petroleum and Tailwind Energy both recently said they could keep paying out dividends until their oil and gas portfolios run dry before “turning out the lights” if other exit options for their backers don’t pan out.
For public companies, going private could provide a lifeline, pulling them clear of stakeholder pressure, Mr Parker said, adding that he didn’t expect this route to become “dominant”.
Mr Parker warned that upstream E&P firms face “existential choices” as investors prioritise stable dividends underpinned by a strong balance sheet, low cost of capital and top-quartile environmental, social and corporate governance ratings.
As a result, independent E&P firms will need to “evolve” in an effort to minimise risks, which could mean shying away from investments which aren’t likely to provide a quick payout.
This shift would represent a change to the very nature of independents, as the risk-reward balance – traditionally core to their value proposition — would be diluted.
Mr Parker expects consolidation to “accelerate” in the face of the energy transition and become a defining theme over the next decade and beyond.
He said the world no longer needed “thousands of independents” chasing volumes of oil and gas.
“In a future that threatens terminal decline and massive value destruction, the dynamic is shifting,” Mr Parker said.
“The independents will no longer get endless chances to re-invent themselves. Failure at the margin will, increasingly, be terminal.”
Many of the most attractive independents will combine, perhaps morphing into diversified “mini-majors” with growing carbon, capture, utilisation and storage or renewables businesses.
Mr Parker said: “The independents that positioned themselves well for this future – advantaged assets, cash generative, resilient to low prices, strong balance sheet, top quartile ESG – are best placed to evolve.
“They are able to remain independent for longest, but they also make the most attractive consolidation targets.”
Mr Parker said this process may already have started: “We may come to look back on the last few months as the beginning of the consolidation that will define the oil and gas sector over the coming decade and beyond.”
Recent high-profile deals involving companies with large UK North Sea footprints include private-equity backed Chrysaor’s reverse takeover of London-listed Premier Oil.
The transaction will create the largest independent oil and gas company listed on the London Stock Exchange on completion.
In oil and gas, independents are those which focus solely on the exploration and production of hydrocarbons and don’t typically have midstream or downstream assets like pipelines and refineries.
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