Oil and Gas Investor A&D Trends: Death by 1,000 Viruses

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E&Ps are seemingly getting it together in 2021—certainly more than their bacchanal days of $100-plus oil, when shale was considered invaluable and invincible.

These days, oil and gas companies are spendthrifts. Oil is on the cusp of $80/bbl, but there’s seemingly a disinterest in producing more except through well-by-well tune ups and plugging emission leaks.

Instead, they’ve taken up the mantle of scale, the virtue of low leverage and the most sanctified of vows, free cash flow. E&Ps have found Wall Street religion.

But it does beg the question: How will the ever competitive universe of oil and gas companies differentiate themselves?

Certainly, 2020 emerged as both a test and race to prop up environmental bona fides with billions of electronics cut down to make way for vaguely detailed ESG reports. But E&Ps finished their holy rites with a commitment to those three little letters that are now enshrined on every oil and gas brain and press release.

For deals, the environmental aspects that were once a part of the conversation are now as liable to lead discussions, joining cash flow, production and PV10 value as part of the metrics to justify a deal.

And, truthfully, the industry needed a little bit of a facelift after years of being called, fairly unjustly, the “Destroyers of the Earth.” Even Robert Oppenheimer would be appalled.

ESG is now a factor in nearly every deal, given its due and diligence alongside geology, spacing and lateral lengths. How important it truly is, remains as mysterious as how ESG is actually measured. Generally, an acquisition means company X will be purchased and its emissions will go away.

And it looks poised to turn into just another generic metric, the way production equals cash flow and cutting opex and G&A equals scale. ESG is only different in that it’s more about the feel-good factor, allowing investors to assuage their conscience as they park money in an energy sector currently outpacing the S&P 500.

So, job well done? Typically this is where one would relax, kick off his or her shoes, pour a glass of something red and woody and sigh a little relief.

Here though, we should heed the lessons of John McLain, who no sooner had balled up his bare feet on a California Christmas and then was at war with approximately 212 German bank robbers.

Already, it is clear that there is yet another standard to which oil and gas companies will be held, perhaps more so than any other: cybersecurity.

It’s convenient to point the finger at Colonial Pipeline’s ransomware attack earlier this year. But this is largely perception.

Yahoo, Facebook and even credit agencies get hacked. But the immediate threat, while just as real, isn’t as acutely felt.

Put simply, credit card numbers on the dark web sounds scary. Gasoline shortages on the eastern seaboard are much more in the here and now.

So how much should companies be considering cybersecurity when contemplating a deal? PwC is happy you asked.

In a recent presentation, PwC noted that date-dependent E&Ps are now even more exposed as they implement digital oil fields and rely on vast stores of data that are connected to previously unexposed legacy computer systems. Digitization has been good for the industry but also opened up risks.

Some private companies, for instance, are unregulated in these areas. Other E&Ps have rolled up less sophisticated companies in mergers, exposing acquirers to risk.

To hammer home the point, PwC noted in a June presentation that there were 900 reported breaches of companies in the first half of 2018 with 1.2 billion records breached. By 2021, the number of records breached surpassed 4 billion. Also, in the past three years, cyber breaches have gone from being published yearly to monthly this year.

And ransomware remains the main means of attack.

Colonial, with clear help from the U.S. government, was able to restore its systems and (probably) identify the bad guys.

So expect cybersecurity to be a larger part of the way in which deals are evaluated. PwC said that 82% of polled investors say they assess an organization’s value higher if it has a robust cyber defense.

And dealmakers are likely interested to know if their acquisition targets have been hacked, compromised or otherwise sullied. In the digital world, meme is money. Just ask Colonial.

Please join us for our first live A&D Strategies and Opportunities Conference Sept. 28-29 at the Fairmont Hotel in Dallas. After a year-long pause and a raft of consolidation, asset deals are shaking out once again and we’re on it. We’re convening with a day of great discussion topics, compelling speakers and a roomful of dealmakers that you can actually shake hands with. Let’s do this, and may all your deals be accretive. Visit adstrategiesconference.com.