Role of ESG on the rise in shale dealmaking

The role of ESG metrics in US shale dealmaking is growing, but there is still a long way to go, analysts say.

Environmental, social and governance (ESG) metrics are increasingly at the forefront of oil and gas industry concerns. The focus, in particular, is on the environmental aspect, which covers long-term decarbonisation goals and even net zero greenhouse gas (GHG) emissions for a growing number of companies.

Among other areas, this is increasingly playing into dealmaking, including for the US shale industry. The current wave of shale mergers and acquisitions (M&As), which started in the second half of 2020, is only now slowing down. There could be more transactions still to come, though, and more producers can be seen talking up the positive impact of their deals on their emissions profiles.

“We’ve seen a substantial increase in the reporting of ESG metrics in M&A deals in the past two years, but they have rarely been the key driver touted for an acquisition,” data provider Evaluate Energy’s senior M&A analyst, Eoin Coyne, told Gas Outlook. He added that economic factors such as free cash flow have remained the primary driver for acquirers.

“The fact that we’re seeing ESG metrics mentioned in so many deals shows that ESG is definitely part of the conversation,” Coyne continued. “We expect this to grow further as there is still a lot of room for growth, especially as we get closer to the 2030 GHG reduction target as part of the Paris Agreement.”

Indeed, there is still a long way to go. Information company Energy Intelligence’s director of research and advisory, Abhiram Rajendran, told Gas Outlook that he still sees ESG metrics as playing a minor role in more traditional oil and gas dealmaking, though it is incrementally playing into new energy investments – as in, those focused on low-carbon technologies.

“It is only happening very slowly in the US, however, and is much more limited relative to Europe,” he said.

Emissions profiles

Nonetheless, the concept of lowering a company’s emissions profile via dealmaking is gaining traction.

Coyne cited Chesapeake Energy’s acquisition of Chief E&D Holdings, announced on January 25, as the most recent high-profile example of an emissions profile decreasing upon closing of the deal. Other companies touting emissions profile improvements include ConocoPhillips, which bought Royal Dutch Shell’s Permian Basin assets for $9.5 billion in December, saying the acquisition lowered its average GHG intensity.

“I think it will be part of the thinking more and more going forward,” Rajendran said of companies making deals that benefit their emissions profiles. He added that this could include both investments into new energy that bring down corporate emissions profiles and also oil and gas deals where assets with a lower carbon footprint are sought out.

Touting such ESG gains can prove beneficial in the current investment environment.

“We’re seeing many institutional investors making statements about sustainable investing and ESG-related portfolio targets,” said Coyne. “A decrease in emissions intensity can keep the door open to these sustainability-linked investments.”

For a prospective buyer, there is a growing amount of data that can help establish the emissions profile of an asset.

“I think the carbon profiles are pretty straight forward to figure out – even if certain companies are not as transparent about certain metrics (like flaring, methane leaks, etc) there are third-party data sources to figure this out for prospective buyers,” Rajendran said.

However, the widespread availability of ESG data also has a downside, albeit one that appears set to be addressed over time.

“The US shale basins have some excellent datasets covering core ESG metrics such as methane emissions and flaring volumes,” an Evaluate energy analyst, David Muirhead, told Gas Outlook.

“One of the major challenges comparing upstream ESG performance in current workflows is the disparate array of potential data sources and whether this is available to an acquirer depends on their data proficiency. As shale companies up-skill to take on the ESG goals like net zero, ESG data and metrics will become ever more integrated and standardised in A&D [acquisitions and divestitures] due diligence workflows,” he added.

M&A slowdown

The focus on ESG metrics may be increasing, but the wave of shale M&A activity is expected to slow this year.

Rajendran said he believed a further wave of mega-deals to be unlikely; though he still sees potential for medium-sized deals – but not among the large-cap players.

“Those companies have come out of the downturn in a strong position, so would be likely to do tuck-in acquisitions to extend inventory, find further synergies and of course – if possible – improve their ESG ratings,” he said.

Coyne also anticipates merger activity abating to “normal levels.”

“Potential sellers are likely to feel the high commodity prices haven’t been fully reflected in their valuations whilst buyers are likely to remain wary of over-committing by assuming prices will remain strong,” he said. “This buyer-seller valuation gap will reduce the momentum we’ve seen over the past 20 months.”

Among those deals that still emerge over the coming year, though, it is reasonable to expect more mentions of ESG metrics. Given that ESG credentials are winning favour with investors, as Coyne suggested, it is in producers’ interests to display them.

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