Boardroom IntelligenceCategory

On the Brink of a Super Cycle: What’s Next for Oil and Gas?

By Jefferies Editorial Team
3 min read

Rising interest rates and fears of recession dampened dealmaking across much of the global economy in 2023. One sector, however, not only showed resilience but set new records. Global energy companies reached their highest valuations since 2016, with 1,135 deals generating $281 billion in global M&A value, an 8.2 percent increase over the previous year.

This growth was largely driven by American oil and gas, where the world’s largest energy producers turned to address the global supply shortage. The year culminated in a series of mega deals, including Chevron’s agreement to acquire Hess and Exxon’s agreement to acquire Pioneer Natural Resources, the two largest transactions of 2023.

So far, 2024 has been another big year for the sector, but could growing uncertainty about Fed rate cuts threaten its momentum? Jefferies sat down with Pete Bowden, Global Head of Industrial, Energy, and Infrastructure Investment Banking, to discuss the energy sector's consolidation, the potential for a “super cycle,” and more.

Consolidation and Expansion: Oil and Gas in 2023

In 2023, major geopolitical events, including the ongoing Russo-Ukrainian war and a new conflict between Israel and Hamas, continued to strain the global energy supply. With diminished access to oil from Russia and the Persian Gulf, Western countries looked to the United States for relief.

In response to rising global demand, integrated oil companies – which operate across the upstream, midstream and downstream sectors – looked to expand their inventories in the Permian Basin. This region, spanning western Texas and southeastern New Mexico, is the country’s highest-producing oil field.

"Global supply is falling short by five to eight percent of what's needed," Bowden shared. “Oil companies recognize that North American production is more important than ever, and inventory is limited. They’re focused on the Permian Basin, which is the epicenter of US drilling.”

In the final months of 2023, the industry saw significant consolidation: Chevron agreed to acquire Hess for $53 billion; ExxonMobil agreed to purchase Pioneer Natural Resources for $59.5 billion; and Occidental Petroleum committed to buy CrownRock for $12 billion. This trend continued into 2024, with Diamondback Energy announcing its agreement to acquire Endeavor Energy Partners for $26 billion. Jefferies served as lead financial advisor on the deal.

These transactions, all focused on the Permian, reflect efforts by integrated oil companies and large independents to bolster their reserves.

"As prime locations in the Permian are snapped up, what were once considered tier-two drilling locations will gain importance. Given the global shortage and America's role as a supply hub, the economics should work in a half a dozen major US basins," Bowden predicted.

Macro Headwinds and Sector Resilience: The Energy Outlook in 2024

Though M&A in the energy sector has been strong, rising skepticism about anticipated 2024 rate cuts could reduce companies’ appetite for new deals. Persistent inflation and a robust labor market have led some economists to doubt a rate cut this summer. However, commodities like oil and gas, traditionally a hedge against inflation, don’t always respond to rate changes like other asset classes.

“Right now, we’re in the perfect environment for oil and gas dealmaking. There’s a belief that interest rates are coming down and the assets are becoming more valuable,” Bowden said. “Even without a rate cut, the oil and gas bond market should continue to outperform. Prices will stay constructive, and there will still be deals.”

Bowden noted that mega deals from integrated oil companies are pressuring businesses of all sizes to transact. This push might signal the start of a “supercycle” in American oil and gas.

“With the industry consolidating, what were once large independents are now effectively mid-caps, and mid-caps have shifted to small-caps. Companies need to make deals to stay relevant,” he explained. “My perspective, as a generally skeptical guy with 25 years of industry experience, is that it is as good a market as we’ve seen and we’re likely heading into a super cycle.”

Though the energy transition is underway, it cannot progress quickly enough to offset current shortages in the global energy supply. As geopolitical conflicts, new and ongoing, create tailwinds for domestic oil production, American energy companies are expected to keep seeking opportunities to boost production and build their reserves in US basins.

For more insights from Pete Bowden and Jefferies, the leading advisor on M&A transactions in the energy sector for the last decade, read this recent interview with Bloomberg on the sector’s outlook in 2024.