Consolidation amongst oil and gas independents is expected to accelerate as the energy transition continues and investors gravitate towards stable dividends underpinned by a strong balance sheet, low capital costs and top quartile ESG ratings.

Wood Mackenzie vice president Luke Parker said that with the world on a two-degree glidepath, which seeks to limit global warning by two degrees Celsius, there was no need for thousands of oil and gas independents chasing volume.

“The Independents’ strategies will need to evolve, as they move to minimise risks they can control. For most, investment horizons will get progressively shorter across the board – exploration, development, and acquisition. Anything that does not pay back in a narrowing timeframe will be increasingly overlooked,” he added.

“But with that shift, the very nature of the independents will change. The risk-reward balance that has always been core to the E&P ‘value proposition’ gets diluted.

“Independents increasingly look and act like larger companies, only without the advantages of actually being a larger company.”

Oil and gas consolidation

As a result, Woodmac believes that consolidation will be a defining theme over the coming decades as the most attractive oil and gas companies combine into pure plays with niche attributes at scale or into diversified ‘mini-majors’ with growing carbon, capture, utilisation and storage, or renewables businesses.

“The independents that positioned themselves well for this future – advantaged assets, cash generative, resilient to low prices, strong balance sheet, top quartile ESG – are best placed to evolve,” Parker explained.

“They are able to remain independent for longest, but they also make the most attractive consolidation targets.”

He added that some oil and gas companies might shrink their upstream operations or even exit oil and gas entirely while others might be gobbled up by supermajors such as Chevron’s acquisition of Noble.

Private capital – private equity, hedge funds and sovereign wealth funds – may also see opportunities in buying low-multiple and high cash-flow companies that would otherwise struggle to attract new funding.

Companies that don’t consolidate or adjust could face wind-down in the longer term, though this might represent a strategic choice.

“In a future that threatens terminal decline and massive value destruction, the dynamic is shifting. The Independents will no longer get endless chances to re-invent themselves,” Parker concluded.

“Failure at the margin will, increasingly, be terminal.”