M&A activity in the energy and natural resources industry remained sluggish in 2022, rebounding only around 20% from 2021 and not yet recovering to pre-pandemic levels. Partly, this was the result of companies looking for demand to stabilize. Then, as stabilization largely took place, a second factor came into play: Companies began sharpening their capital discipline. Which slowed dealmaking as fewer deals met their higher hurdle rates.

We believe that conditions are primed for an upswing propelled by a resurgence in industry consolidation and portfolio management. The oil and gas industry is still highly fragmented in many sectors, and multiples remain depressed. Setting the stage for consolidation to unlock new levels of efficiency. The conflict in Ukraine adds more complexity to the market. Many companies actively reviewing their portfolio and some exiting their Russian positions as BP has done.

Meanwhile, there will be growing opportunities for portfolio management across the energy and natural resources, especially in chemicals. Over the years, companies have expanded their portfolios to the point. That there’s now a lack of natural synergies among assets and a high degree of complexity.

Above all, though, companies will turn to M&A to make more progress on the monumental journey of moving the world closer to a lower-carbon, sustainable future while also keeping their current businesses running. Many large companies also have already pursued deals that accelerate their participation in the energy transition that, at its heart, requires all companies to reinvent themselves.

In 2021, energy transition deals accounted for about 20% of all energy-sector deals greater than $1 billion.

The energy and natural resources industry’s reliance on M&A in 2022 also to deliver the energy transition will play out across seven themes.

Greening existing operations and strengthening environmental, social, and corporate governance (ESG) assets. Companies are aggressively making deals aimed at reducing carbon production from their operations to meet net-zero targets. For example, Occidental Petroleum is one of the top producers in the US’s Permian Basin. Is acquiring solar generation also asset to power its drilling and completion operations? At the same time, Suncor is partnering with other oil sand producers while investing to commercialize carbon-capture technology.

Building green energy hubs. Deals are also fueling companies’ efforts to move beyond greening their existing operations and toward fundamentally changing their inputs. Production processes, or products. BP and Equinor’s strategic partnership, Northern Endurance Partnership, was together with Eni, National Grid, and Shell. And Total to create a refinery of the future that will act as a green energy hub within an industrial cluster. It will maintain integrated sourcing and production of renewable energy. With new feedstock streams and lower greenhouse gas fuels and products.

Repositioning portfolios toward the energy transition. Companies are using M&A to accelerate shifts in their portfolios. This involves both divestments of high-carbon assets as well as investments in the energy transition.

In their effort to rely on deals to deliver the energy transition, some companies will also emerge as leaders. Here’s how M&A practitioners in energy and natural resources can boost the odds of success.

Take an activist approach to portfolio management. As portfolios change and become more diverse, companies need to undertake more frequent asset reviews to manage their business through this change. This review is critical in ensuring that the existing business continues to meet current goals and would clear the same hurdles for investment today. Leaders need to either invest in improvement or divest those areas where performance is falling short of what’s for today’s corporate strategy.