No matter where you look—upstream, midstream, or downstream—mergers and acquisitions have surged, hitting all-time highs, both in terms of quantity and deal value. While M&A deals may have different motivations (access to new geographic territory, building on existing positions, combining symbiotic businesses, etc.), the overriding goal is to increase commercial and operational value to the new owners. The ideal deal requires that:
- Buyers perform due diligence before the merger.
- Sellers position themselves to be an attractive acquisition target.
- Newly merged companies execute the right initiatives to drive value.
- Buyers have considered the cost and feasibility of technology integration.
The following trends are currently driving the pursuit for both operational efficiencies and commercial value in the oil & gas industry and affect buyers and sellers throughout the deal cycle.
Energy Transition: Performing Due Diligence
A growing focus on renewable energy sources, energy efficiency, and sustainability initiatives has led established oil & gas companies to consider M&A activities that integrate traditional oil & gas operations with renewable energy assets. The availability of financing and investment opportunities is increasing for energy transition projects, including renewable energy ventures, green technologies, and carbon-neutral initiatives.
A major energy company wanted to invest in energy transition technology, but realized they didn’t have the internal resources and know-how to evaluate the long-term commercial viability of various energy transition opportunities. Using research, technology readiness and manufacturing readiness assessments (TRL/MRL), economic and cost assessments, and multi-dimensional data analytics, SGS Maine Pointe performed due diligence into six energy transition technology companies to evaluate the investment opportunities and risks. We also developed a “playbook” that the energy company could use to investigate the development, operational, supply chain, and installation risks and maturity of future candidates.
Portfolio Rationalization: Making a Company Attractive
Companies are evaluating and restructuring their asset portfolios to focus on core strengths, divest non-core assets, and reallocate resources to high-growth areas. Any company that wants to appear as an attractive target must offer clear, verifiable opportunities for growth and operational synergies (savings).
SGS Maine Pointe has extensive experience working with companies that are positioning themselves as an attractive acquisition target with value creation initiatives such as streamlining processes, reducing costs, and optimizing inventory levels. We helped a refinery realize that inconsistent processes, an absence of ownership and accountability, and a lack of in-house capability had contributed to escalating costs. Moreover, lack of coordination between operations and logistics was creating sky-high storage costs.
We worked with the client to quickly develop planning, procurement, operations, and logistics, along with leadership and organizational improvements (LOI) and standardized management operating systems. By driving operational efficiencies, analyzing spend, renegotiating freight rates, and introducing a pricing matrix, we delivered $5.5 million in annualized savings, with another $50 million identified.
Supply Chain Optimization: Driving Value Post-merger
Supply chain synergies are often noted as a significant contributing factor to an acquisition or merger. However, post-merger, the companies involved may find it more challenging than anticipated to realize the expected benefits from the combined supply chains, spend categories, and procurement processes. By rationalizing categories, setting company-wide procurement operations management processes, and optimizing their network, the newly-merged companies can gain economies of scale, consistency, and a stronger supply chain.
Before a reverse merger, the PE owners of a company turned to SGS Maine Pointe to understand the reason why the company was losing money. Our competitive assessment revealed that the company’s cost of goods sold (COGS) had risen to 30% more than the competition’s. We established unified goals, upskilled procurement, and initiated supplier optionality and strategic sourcing. By implementing those comprehensive changes, we delivered $30 million in cost savings in year 1 and provided a roadmap to $32 million to $37 million in savings in year 2.
Digital Transformation: Determining Strategic Fit
Oil & gas companies are increasingly adopting digital technologies, such as AI, IoT, automation, and data analytics to optimize operations, improve decision-making, and enhance efficiency throughout the value chain. Remote monitoring, virtual collaboration tools, and digital workflows, for example, are enabling more efficient and flexible operations, especially in undesirable or hazardous locations. Digital tools such as models of the supply chain and predictive analytics give oil & gas leaders visibility into the supply chain and promote data-based decision making.
Target companies may have legacy systems that make it harder to integrate IT systems, data platforms, digital tools, and software applications to facilitate data sharing, streamline workflows, improve decision-making, and enhance operational visibility. Therefore, oil & gas companies need to carefully assess the technological capabilities and compatibility of any potential merger or acquisition to determine strategic fit and their digital capabilities, as well as the cost of integrating disparate systems.
Conclusion
Energy transition, portfolio rationalization, supply chain optimization, and digital transformation are just four of the drivers of increasing M&A activity in the oil & gas industry. For a company to gain both commercial and operational efficiency and value, it must aim for:
- Due Diligence: Conducting thorough due diligence to assess the target company's financial health, operational performance, assets, liabilities, contracts, regulatory compliance, and potential risks. This involves reviewing technical data, financial statements, legal documents, and environmental assessments.
- Risk Management: Identifying and mitigating operational risks such as market volatility, geopolitical uncertainties, supply chain disruptions, and technological challenges to safeguard business continuity.
- Supply Chain Rationalization: Consolidating supply chains, optimizing procurement processes, and renegotiating contracts with suppliers to achieve cost savings.
- Technology Integration: Ensuring the smooth integration of IT systems, data platforms, and digital tools to streamline operations and enhance decision-making.
- Integration Planning: Developing a comprehensive integration plan that outlines timelines, objectives, roles, responsibilities, communication strategies, and key performance indicators (KPIs) for the integration process.
- Asset Optimization: Assessing and optimizing asset portfolios post-acquisition to eliminate redundancies, maximize production, and reduce operational costs.
- Performance Monitoring: Continuously monitoring and evaluating post-merger performance against established KPIs, benchmarks, financial targets, and strategic objectives to assess the success of the integration, address challenges, and make adjustments as needed.
- Strategic Fit: Evaluating the strategic fit between the acquiring company and the target, including assessing synergies, market positioning, growth opportunities, geographic presence, technological capabilities, and portfolio alignment.
