When oil prices rise, upstream operators spend the surplus cash on deals for growth—or so the conventional wisdom goes. But that correlation seems to have broken down.

WTI crude surged to US$130 per barrel in the aftermath of Russia’s invasion of Ukraine, up from around US$72 in December. That should have triggered a slew of M&A activity, but investors have become more profit-minded and less focused on growth, prompting oil & gas companies to be more selective.

Crude prices climbed by approximately 75% over the course of 2021, and yet announced M&A deal value fell to US$54.1 billion for the year from US$70.8 billion in 2020, according to Dealogic.

Capexed out 

As Kate Hardin, a managing director with Deloitte Services who leads a research team that works on oil & gas, chemicals, energy and industrials, recently told Mergermarket, capital expenditures did not keep pace with the increase in oil prices either, climbing only around 16% in 2021.

Deloitte estimates that, between the US shale industry’s booms and busts in the past decade, participants burned through US$300 billion. These days, they want to see earnings rather than revenues, hence the lack of acquisition activity.

Curve ball

Uncertainty may be another factor. Energy demand recovered strongly in 2021 as the global economy sought to put the pandemic behind it. But in the past month the price of crude still bounced between around US$95 and US$123.

Last week, the yield curve began flashing red, its inversion suggesting a recession could hit towards the end of 2022 or in 2023. This would mean falling economic demand and a softer oil price.

Nevertheless, consolidation among operators in the same basin was a theme in 2021 and early 2022, and there is an opportunity for buyers to acquire non-core assets. ConocoPhillips has reportedly mandated an adviser to run an auction for more of its Permian position, while ExxonMobil is said to be preparing a sale of its Bakken assets.

There are deals out there for the right buyer, but all eyes are on when, or if, oil prices and M&A resync.