While there have been periods in recent years where experts predicted a wave of merger and acquisition activity would take hold because of volatile industry conditions, it’s rarely played out that way in reality.

But that seems to be changing in this era of the COVID-19 pandemic, stingy debt and equity markets, and continued uncertainty around the outlook for commodity prices, says Eoin Coyne, senior analyst at Evaluate Energy.

And, he notes, it’s the merger aspect of M&A that seems to be leading the recent uptick in activity.

“The main theme is the mergers. The thing that struck me is this has often been predicted that there’s going to be consolidation in the industry but it usually doesn’t play out,” he said.

“So when the oil price went down at the end of 2014 and the start of 2015, a lot of people said this is where the mergers or consolidations were going to kick-off. But it really didn’t happen. But it has happened this time,” Coyne added.

“That’s just a case of where maybe companies were trying to hold onto their shares a bit harder in the past because obviously a lot of them probably thought it was a bit of a blip. But there’s probably a bit more pessimism this time, especially in getting credit for anything.”

According to Evaluate Energy’s latest report, M&A activity rebounded strongly in the global upstream sector during Q3 but total values are well shy of historic norms, while weak demand led to deal structures more akin to friendly mergers.

All told, $24 billion of new upstream oil and gas M&A deals were agreed in Q3. This total is dramatically higher than the $4 billion — a historic low — of deals agreed in Q2 2020. But it compares poorly with an average quarterly deals value of $35 billion over the previous five years.

Recent North American transactions post Q3 include the mega-merger between Cenovus Energy Inc. and Husky Energy Inc., Pioneer Natural Resources Company’s acquisition of smaller rival Parsley Energy Inc. and ConocoPhillips’s move to buy U.S. shale oil producer Concho Resources Inc. for US$9.7 billion.

Coyne said the Cenovus-Husky deal does “seem to be in a similar vein” to other low premium deals “since the deal was actually intended to be an at-market merger at the time of negotiation until the share price of Cenovus and Husky diverged.”

He noted that the deal also joins Pioneer’s acquisition of Parsley and Conoco’s acquisition of Concho as the other major deals since the close of Q3, and that there were “more deals in value in October than the whole of Q3 with those three added up.”

That trend continued into November, with Tourmaline Oil Corp.’s announcement last week it plans to acquire Jupiter Resources Ltd. and Modern Resources Inc.

And while M&A activity has picked up, Coyne said premiums paid have been low compared to historic norms.

“The main thing I think we’re seeing is the low premiums involved. A lot of companies are just seeking safety. Obviously they want to maximize shareholder returns but the big part of that is also in just de-risking the shares,” he said.

“So in the past, it would take premiums of about 40 per cent — maybe 50 per cent — to get target shareholders’ shares. Otherwise the shareholders would say, ‘You’re not being a good steward because we can get more if we go it alone,’” Coyne added.

“But now it’s the Devon-WPX premium where it was three per cent or the Chevron-Noble premium that was less than 10 per cent. So these are really small premiums. The acquirers are not having to work hard to get the shares. They offer just to trade in share price plus a little bit more. And that’s all that it takes.”

Coyne is of the mind that the recent trends he’s seen are likely to continue moving forward.

“I think there’s just less optimism just because we’ve been in a mostly low oil price environment now for five years. There’s less optimism that things will suddenly bounce back,” he said.

“We don’t have an end in sight for when the pandemic will end. And, as well, there’s talk about the energy transition accelerating. There’s even concerns and talk about if there’s going to be as much transit demand in the future in terms of going to our work locations. There’s going to be more work from home,” he added.

“So I guess it’s just a bit more pessimism about what the picture is going to look like whenever we come out of the pandemic.”

While North American M&A in recent months has been more active in the U.S., Coyne said there could be a continued trickle-down into the Canadian oil and gas space.

 “The lack of access to credit means the target company doesn’t have as many choices as they did in the past. If the oil price continues where it is at right now we’re going to see a continuation of some mergers to some extent, in Canada and elsewhere.”

The full report is available for download at this link.