Energy prices have been robust throughout 2022. This exceptional rebound in business activity has yet to translate to more deals. But this may be changing.

The M&A market in this space “hasn’t translated to a bonanza of dealmaking,” according to Andrew Dittmar, director at Enverus Intelligence Research.

Years of underinvestment and a supply crisis created by the conflict in Europe have pushed prices up, significantly improving the profitability of producing crude oil or natural gas. In its most recent quarter, Occidental Petroleum‘s earnings quintupled to more than $4.1 billion. The company also slashed its debt burden by $4.8 billion and launched a $3 billion share repurchase program.

The energy giant’s decision to allocate free cash flow to shareholder rewards and deleveraging reflects a common theme across the sector. Oil and gas producers are more focused on strengthening their balance sheet and compensating patient shareholders who’ve lived through an eight-year bear market rather than expanding operations. This could be why M&A activity was subdued during the first half of 2022.

However, a pivot could be around the corner. Upstream energy deals worth $16 billion were completed in Q3, making it the best quarter for M&A this year, according to data published by Enverus Intelligence Research.

Cenovus’ acquisition of the Husky Toledo Refinery in Ohio for $300 million and Northern Oil and Gas’ acquisition of Northern Delaware Basin properties for $130 million in recent months highlight this rebound in M&A activity.

“Despite rising costs, E&Ps are still generating cash and some companies may decide to direct portions of that toward M&A,” says Enverus’ Dittmar. “Additionally, OPEC looks willing to reinsert itself into oil markets, which could bring stability and help buyers and sellers come together on pricing.”

OPEC (Organization of the Petroleum Exporting Countries) member states recently decided to cut oil production. Statements issued by oil-producing countries such as Saudi Arabia, Iraq, and Kuwait clarified that the decision was “a pre-emptive approach that supports market stability,” and provides some guidance on future prices.

Meanwhile, the White House is also seeking some predictability. The administration announced a plan to repurchase oil at fixed prices in FY2023 and beyond to stabilize oil prices.

This kind of stability could create the right environment for a pickup in M&A.

Vishesh Raisinghani