Thought Leadership

U.S. Upstream Review and Outlook

Client Updates

It is likely that trend of consolidation will continue to drive M&A activity as smaller companies seek scale in order to remain competitive versus larger (and better capitalized) companies with low-cost operating models. The outlook for public equity and debt capital markets activity is a bit less optimistic for all but the most well-capitalized players unless the rise in commodity prices can be sustained.

The first quarter of 2021 was the busiest for the issuance of new high-yield energy debt. It remains to be seen whether the new capital will be deployed for growth rather than opportunistically to lower the cost of capital or refinance upcoming maturities, as has been the recent trend. The industry is also embracing new technologies to monitor data and reduce emissions which could create new opportunities for investment and cross-sector deal activity.

In the mineral and royalty sector, 2021 promises to continue to be another strong year. The significant capital invested by private equity sponsors, combined with challenging capital markets opportunities and lack of scale for many private companies, likely means continued consolidation and acquisition opportunities by well capitalized companies.

Green bonds, green bond funds, and other debt instruments linked to sustainability initiatives are increasingly becoming popular ways for investors to align their portfolios with internationally recognized sustainability goals. An estimated $200 billion of green bonds were issued in 2020, and the overall market size could eclipse $1 trillion by the end of 2021 as larger institutions and sovereigns enter the market.

While economic and political uncertainties and increasing ESG (environmental, social and governance) concerns are expected to continue to drive market challenges in 2021, opportunities will exist for companies that demonstrate the most sustainable strategies for profitable growth. The drive away from growth-oriented models will continue to enhance investment in service technologies to drive further cost savings.

On the regulatory and political front, the Biden Administration and the Democrat led Congress have shown support for strengthened regulation throughout the industry as the focus on climate change continues to gain momentum. The U.S.’s production levels are unlikely to reach the 2020 highs of over 13 million BOPD under the Biden Administration, however this reduction coupled with OPEC+’s pledged restraint, will benefit prices going forward. Additional infrastructure spending proposed by the Biden Administration, if enacted, is also likely to contribute to generally favorable economic conditions.

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