Consultancy firm McKinsey and Company’s latest report predicts a wave of mergers and acquisitions (M&As) will dominate near-term actions in the North American upstream industry. 

The report examined projected operational and financial performance and historical cashflows for 25 North American exploration and production (E&P) companies. In 2022, operating cash flows reached up to $85bn, with a cash balance of approximately $70bn to $100bn towards the end of the year. The report projects high levels of free cash flows, from $70bn to $90bn in 2023, and $50bn to $70bn before 2027, even if oil prices decrease. 

Some companies have used their operating cash flow for capital expenditure re-investment, debt reduction, shareholder returns, and energy transition projects. According to the analysis, the 25 E&P companies’ debt load decreased by $25bn from 2021 to 2022. It also shows that debts will further decrease by $15bn to $20bn by 2027. 

Share buybacks tripled between 2021 and 2022, reaching a record of $21bn for the companies in the report, representing approximately 5% of total outstanding shares. Dividends have also doubled over the same period to reach a record high of $23bn, increasing to around $30bn to $40bn over the next year. 

The report showed many operators have either opted to reduce industrial emissions or have made early moves to take part in energy-transition value chains. The company report expects 5% of operating cash flows to be allocated towards such measures. 

“Dealmaking in the North American upstream sector in 2022 generated relatively low upstream transaction value compared to previous years, due to high oil prices and macroeconomic factors impacting all sectors, including geopolitical instability, inflation, and the possibility of recession,” the report reads. 

Oil and gas industry trends suggest that multiple M&A strategies have driven the supposedly upcoming wave of consolidation. The report suggests that integrators may seek to add assets in adjacent value chain portions to expand margins. It said that companies like BP would most likely use a part of its cash stockpiles to seed businesses that may eventually reshape their portfolios and prepare for their energy transition.