A new McKinsey report finds that more than 50% of upstream oil and gas M&A deals don’t create shareholder value and firms eyeing takeovers and acquisitions should focus on synergies rather than cost-cutting.
Research by the global management consultants claims that of the hundreds of major E&P deals analysed since 2010, less than half were successful in delivering value for shareholders as firms focus too narrowly on slashing spending to deliver results.
The warning comes as a wave of mergers, acquisitions (M&A) and market consolidation is expected, as oil and gas producers consider what to do with record piles of cash amassed over the past 18 months.
The report authors – consultant Jeremy Brown and partners Tom Grace and Steve Miller of the firm’s Houston office – found that there have been around 750 upstream deals with a transaction value of at least $100 million since 2010.
Although most deals amounted to less than $1 billion in size, deals greater than $1 billion have contributed the largest portion of transaction value since 2016.
Yet they found that most of those deals “haven’t created value”.
© Supplied by McKinsey“Many deals are limited to a focus on reducing general and administrative (G&A) expenses and ignore any operational synergies that may exist,” they suggest.
They therefore argue there is a “lost opportunity” for firms to widen their parameters when cutting deals to look beyond basic expenses, after they found that “M&A deals pursued for operational synergies typically outperform those based on G&A savings.”
“All too often, upstream deals have limited their synergy goals to the low-hanging fruit of G&A reductions. Our experience shows, however, that operational synergies are almost always larger than G&A savings—often by a factor of three or more.”
The deals that were successful in appreciating this created “outsized returns” for shareholders, they said.
Public pressure
The authors suggest that any proposed upstream mergers should be used as a jumping off point for a wider “transformative approach” that could include wider synergies in revenue, production, operating costs and capital efficiency.
They put this forth as an alternative to the oft-taken route of simply reducing headcount and slashing company expenditure.
The authors said committing publicly to new operational targets also helps drive results.
“While there is a negligible link between communicating additional information about the deal and the initial market reaction, announcing cost-synergy expectations may be tied to significant long-term outperformance over peers,” they report.
The firm’s analysis of nearly 800 deals across various sectors showed that companies that announced synergy targets outperformed those that did not by an incremental 7% over a median of two years.
It also places “healthy pressure” on company executives who may have compensation linked to meeting targets, they said.
Commenting on their findings, Mr Miller added: “While the next wave of mergers and acquisitions may differ from previous waves due to evolving macroeconomic conditions, the importance of value delivery remains critical. Many upstream firms view acquisitions as a ‘bread and butter’ activity that they do well. However, the reality is that many deals don’t create value for shareholders. Clever decisions need to be made by companies to maximize the value from their deals and build resiliency for the future.”
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