Consolidation will continue to be the driving storyline in 2022 as oil and gas companies tilt toward scale and synergies through A&D, although deals will face headwinds from policy uncertainty and a focus on renewable energy.

Seenu Akunuri, leader of PwC’s U.S. energy and mining valuation practice, told Hart Energy he expects 2022 to look similar to last year.

“A lot of the deals in 2021 primarily happened because of the lessons learned in the previous downturn and COVID-19’s impact,” he said. “Companies, especially on the exploration and production side, were all focused on how they could reduce breakeven margins so that they could continue to generate free cash flow, even if commodity prices were lower than what we’re seeing currently.”

With the current commodity price environment, “we do expect there will be continued demand for consolidations. Secondly, we also think some of the majors and IOCs will continue to focus on divesting some of their noncore assets given the growing focus on ESG and pressures to reduce carbon footprints.”

As commodity prices have stabilized—or even fallen into a rut—the relativity strong price tape will allow deal activity to remain elevated through the year, though upstream E&Ps are strengthening their resolve on delivering dividends and buybacks and placing less focus on exploration and the drill bit, according to a December outlook by PwC.

Private equity funds are also apparently likely to stay on the sidelines as several larger funds have pledged to reduce or eliminate fossil fuel holdings.

“This means they are unlikely to be major buyers of traditional energy assets in the future. However, we expect private equity funds to continue making strategic acquisitions around renewables, cleantech and other places within the energy transition value chain to better balance existing portfolios,” PwC said.

Despite the growing focus on low-carbon assets, most of the world’s energy still derives from oil, natural gas and coal, PwC said. Forecasts show oil supplies and demand growing in 2022, creating an opportunity for producers to profit from short-term price increases.

“As a result, we expect deals around traditional energy assets that were prevalent in 2021 to continue into 2022. Still, the outlook for pure E&P deals will be tempered by the shift toward renewables amid a growing focus on ESG investing,” PwC said.

The New Year comes after 12 months of activity rebounded to pre-pandemic levels, with 152 announced deals announced valued at $133 billion. Volume increased in the second half, up 34%, while values grew by 30%. Upstream accounted for most of the growth, with 42 deals valued at $47 billion, PwC said.

While the Permian Basin largely ruled large-scale transactions again, Akunuri sees various scenarios for basins that weren’t part of the after-pandemic deal blitz of 2021.

In the Eagle Ford, Akunuri said the shale play will generate interest based on the assets that are available and their breakeven margins.

“While the Permian Basin is on the lower side of the breakeven market, the Eagle Ford is not too far behind, so we do expect to see continued interest in all three basins,” he said.

Companies may especially be eying the Eagle Ford because of current commodity prices that are poised to generate significant free cash flow.

“Recent demand in natural gas prices has generated a renewed interest both domestically and to support LNG exports,” he said.

In other basins:

The Haynesville, which generated a number of natural gas transactions, is likely to continue its A&D activity as long as natural gas prices stay above $3/Mcf.

The Midcontinent remains a trickier proposition. While the assets range from fair to good quality, breakevens due to uneven pipeline access and wells costs create challenges, though if gas prices hold interest will continue in the play.

The Denver-Julesburg and Powder River basins also remain in play, though they have higher breakeven prices and are further from coastal LNG offramps.

“Companies will tend to be a little more cautious in making investments. There also might be smaller deal activity with private companies who are looking to consolidate and acquire additional acreage, but we may not see large-scale mergers and acquisitions,” Akunuri said.

Finally, will companies look for alternative exits, such as the contemplated IPO of Colgate Energy? Akunuri said it will vary based on management team expectations.

Companies may go the IPO route if they see long-term opportunities to grow the company and not simply monetize acreage.

“However, if companies believe that they’re in a good position to exit and sell to another company, they’ll take it,” he said. “In addition, given the public and investor sentiment mostly unfavorable light being shone on fossil fuel companies, there are definitely some concerns about new IPOs.”

A key to a successful IPO will be a clear strategy for ESG and the E&Ps’ “journey towards a carbon neutral strategy may get more favorable reception in the public markets.”