Buoyancy of Upstream Oil & Gas M&A set to continue into 2022

by Norman Wisely, Partner in the CMS Oil & Gas team in Aberdeen

As the oil price dropped at the start of 2020, many M&A processes were paused, or offers received deemed

unacceptable, and existing processes between signing and completion were terminated or restructured by the parties. 2021 saw an increase in sales processes being run and transactions beginning to move again with some significant deals being signed and completed. 2022 promises more of the same.

Key transactions CMS were involved in during 2021 included Neo Energy acquiring a producing portfolio from Exxon for over $1bn and Neo also signing a deal to acquire JX Nippon’s UK business for $1.6bn as well as being involved in the sale of Spirit Energy’s Norwegian business to Sval Energi for $1.1bn.

The current appetite for deals is borne of increased optimism with oil (and particular gas) prices rising steeply. Deals are also being driven by sellers looking to exit certain geographic areas, non-core assets or even the industry as a whole with the drive to energy transition. Buyers are opportunistic and looking for good deals.

In some cases, buyers and sellers have found it hard to land valuations with volatile oil & gas prices and future uncertainty. Contingent or deferred consideration structures are increasingly normal to allow valuation gaps to be plugged

– where, if the company or asset being acquired does not make sufficient return, the buyer pays less. These structures can be simple, such as oil price or production volumes as the contingent consideration measure, or much more complicated, such as net

profit interest arrangements and royalty structures.

Other deal risks centre around buyers taking on uncertain and significant future decommissioning liabilities, and many deals

in mature areas, such as the UK and Norway, are

structured such that the seller will retain certain liabilities around paying decommissioning costs. Financing is often an issue for buyers, with traditional lenders more reluctant to lend to the industry for volatility and ESG reasons. Novel financing structures are often also then required.

The best advice for any party is to be prepared. There can be significant changes in the period during and after negotiation of any deal - does the buyer have the right to terminate the deal in the event of a material adverse event? What if co-venturers or third parties with consent rights do not approve the transaction? Dealing with the various ‘what ifs’ will give the parties increased certainty around when a deal should complete or is required to be restructured.

“The current appetite for deals is borne of increased optimism with oil (and particular gas) prices rising steeply.