How sustainability programs could boost a company’s appeal to potential buyers.
Deep consolidation is coming to the US oil and gas industry.
In a recent study, Deloitte found challenging oil markets and economic conditions could spur a wave of insolvencies and restructurings and eventually spark a tsunami of mergers and acquisitions (M&A).
The most likely acquirers are major oil companies and large independents. As they conduct their due diligence, assessing operational, financial and cultural synergies of a deal, a new increasingly significant factor may be considered – the seller’s sustainability program and metrics.
Sustainability is at the core of the environmental, social and governance (ESG) movement. Stakeholder groups – largely investors – use ESG metrics to help evaluate a company’s broader impact on society. Since positive ESG practices can attract new investors and build brand affinity across stakeholder groups, many companies have embraced ESG, establishing the acronym as a guiding set of principles.
In today’s climate change era, majors and large independents are being held to especially high ESG standards. In turn, they are striving to produce each incremental barrel of oil cleaner than the last and implement broader sustainability initiatives across their organizations.
As stressed companies vie for an exit and ponder the importance of sustainability to a potential buyer, several growing trends emphasize that now is the time for them to establish, accelerate and raise awareness of sustainability efforts.
Growing activism
While dealing with one of the most severe downturns on record and impacts from COVID-19, oil and gas companies are also experiencing growing investor activism and political pressure. Stakeholders are calling for greater climate action, stricter governance and deeper disclosure. At their annual meetings this year, Chevron and Exxon, for example, faced some of the most aggressive climate-related shareholder proposals to date. While those votes didn’t pass, they demonstrate the public’s growing push for companies to accelerate climate action and support the Paris agreement.
Large independents have also found themselves the target of investor activism. EOG Resources, for example, committed to adopting quantitative targets to reduce methane emissions following interactions with Trillium Asset Management, a self-proclaimed leader in shareholder advocacy and socially responsible investing.
With this heightened pressure and mounting scrutiny, no company will take the risk of acquiring a company without it being accretive to its sustainability metrics, as well as its financial performance.
Bleak operational and financial performance
A Deloitte study found only 27% of shale companies currently represent attractive acquisition targets when considering their financial and operational performance alone. Sustainability performance could bring added value to the deal and differentiate the seller from their peers also vying for a deal.
Companies are scaling up climate action
Despite market conditions, recent announcements suggest the oil and gas industry is committed to producing ever cleaner energy. In May 2020, the Oil and Gas Climate Initiative, which is made up of CEOs from 12 of the world’s largest oil and gas companies, pledged to accelerate the decarbonization of their own operations. A month later, that same group announced the first-of-its-kind collective carbon intensity target, which aims to reduce the carbon intensity of their upstream operations by up to 13% by 2025, a reduction of as much as 52 million tons of CO2e per year.
As pressures mount to report progress against these targets, a company with comparatively lower emissions or a more mature sustainability program may hold greater appeal to a buyer than other viable candidates, especially if acquiring that particular company would help them achieve their own targets or ambitions more quickly or efficiently.
Sustainability playing an increasing role in recent deals
In late September, WPX and Devon Energy announced they would combine in a merger of equals, creating a leading energy company. Highlighted as part of the strategic rationale for the deal was the companies’ shared commitments to ESG excellence, noting they would pursue a methane intensity reduction and advance inclusion and diversity, among other things.
Chevron recently acquired Noble Energy for $13 Billion. While CEO Mike Wirth touted Noble’s diverse, international portfolio and long-term inventory of gas projects in the Eastern Mediterranean as primary drivers for the deal, he also mentioned Noble’s emissions intensity measure in an interview with the Financial Times, saying Noble’s emission intensity was less than Chevron’s and therefore “moves us in the right direction there.”
In a recent podcast interview with David Ramsden-Wood, Occidental Petroleum Corp’s CEO Vikki Hollub said its 2019 acquisition of Anadarko Petroleum would help the company’s commitment to sustainability by creating an asset base where it can apply its core competencies to develop future resources with a lower carbon footprint on a per barrel basis than its peers.
Was ESG or sustainability the primary factor for these deals? Not solely, but was it a factor? Clearly, yes.
Conclusion and next steps
Given the impending uptick in M&A and buyers’ heightened appreciation for sustainability, now is the time for companies to prioritize sustainability efforts and programs, whether that means establishing, accelerating or raising awareness of their efforts.
H+K’s Better Impact communications advisors can help you to navigate questions such as where do we start, where should we focus and how can we measure and report on impact? What matters most to internal stakeholders like employees and external stakeholders like investors? What are our competitors doing, is it working, and what can my organization do to break through and stand out?
We meet companies wherever they are on their sustainability journey and partner to arrive at strategies, programs and communications that are authentic, effective and add value.