Capital Thinking: 2024 Year-End Review and Outlook in the Oil & Gas Market

Deon Daugherty, Editor-in-Chief at Hart Energy’s Oil and Gas Investor Magazine, recently co-hosted the Stephens Energy Investment Banking Group’s latest entry in the virtual thought leadership webinar series, Capital Thinking: Energy Insights for Today’s Market.

The webinar series explores challenges and opportunities affecting the energy sector. This entry focuses on the recent 2024 Year-End Webinar in the Oil & Gas Market. Daugherty spoke with Keith Behrens, Managing Director & Group Head of Energy Investment Banking; Brad Nelson, Managing Director and Head of Acquisitions & Divestitures; and Paul Moorman, Managing Director in the Energy Group.

The panel discussed the state of the Oil & Gas Market, issues impacting deal structures and financing, the roles of public companies, private equity (PE) firms, and family offices in energy transactions, as well as what’s on the horizon for 2025.

Below is a review of some of the observations discussed in the webinar, along with market data and added context.

Major Themes

Mergers and acquisitions have driven a substantial portion of deal volume this year across upstream, midstream, and oilfield services (OFS). Even as midstream and OFS firms face consolidation trends, the OFS space has experienced comparatively less deal flow, perhaps due to softer than expected results in 2024.

Energy firms going up for sale have demonstrated attractive valuations to buyers. Environmental, social, and governance (ESG) considerations no longer focus solely on attempts to transition to renewable energy sources, and have come to recognize the long-term need for oil & gas production. And many energy firms in general have expressed a desire for increased size and scope.

Some of this year’s M&A may also potentially drive debt capital markets (DCM) and equity capital markets (ECM) activity in 2025, as dealmakers may seek to access refinancing or larger credit facilities, or to go public. Buyers may seek strategic assets that are positioned to produce strong cash flow yields, solid long-term returns, and growth potential.

Sellers with innovative technologies or product lines have stood out as desirable targets, and garnered higher valuations as a result in certain cases. Companies active in unconventional oil & gas reserves also are taking advantage of advancements in drilling technology that enable them to improve efficiencies, whether by the service providers or by sourcing from different basins that in previous years were less in focus.

Strategics have engaged in more M&A activity in 2024 than they did in 2022 and 2023. Financial buyers such as family offices also have participated in more M&A deals. Historically, public companies often served as buyers in the energy sector. Over the last several years, private companies have become the main buyers.

A further shift is that in recent years, many energy firms have looked to replace institutional investors, including PE firms and large Wall Street players whom have lost appetite for oil & gas. This has created an opportunity for family offices to fill that void. Energy clients are reaching out to knowledgeable investment banks to make such introductions, as these factors appear likely to persist in 2025.

In the previous five years, family offices investing in the oil & gas space often specialized in the energy sector. Last year, generalist family offices have become more active in upstream and midstream. Within upstream, family offices have gravitated toward minerals and royalties, which are seen as potentially lower risk and capital light – other than the entry price point – while potentially providing fairly predictable yields.

Even so, PE activity in the energy sector did pick up this year through a handful of funds that have either backed new teams or re-invested in teams. These include Trace Capital, Natural Gas Partners, EnCap Investments, Carnelian Energy Capital, Pearl Energy Investments, and Post Oak Energy Capital. In addition, the amount of PE capital raised for the energy sector in 2024 suggests that 2025 could potentially see something of a rebound in PE deal flow.

State of the Oil & Gas Market

The total U.S. rig count was 589 as of December 6, 2024, down by 37 drilling rigs from the count as of Dec. 8, 2023, according to Baker Hughes.[i] There were 482 oil rigs, 102 gas rigs, and five miscellaneous rigs as of December 6, 2024, down from 503 oil rigs, 119 gas rigs, and four miscellaneous rigs as of December 8, 2024. The Permian Basin still takes precedence for many energy firms in terms of activity levels and break-even pricing, although there has been a resurgence of interest in the Eagle Ford Basin and the Rocky Mountain Basins.

Crude oil prices remained relatively stable throughout 2024, rangebound between approximately $65 and $90 per barrel, with prices hovering between $70 and $80 per barrel for most of the third and fourth quarters.[ii] Those prices, along with an absence of drastic price volatility, has enabled energy firms – and their investors – to plan and develop properties capable of generating sufficient returns. That may be why much of the deal flow this year has involved oil companies.

In order for more natural gas dealmakers to have enough comfort to follow through on planning and capital expenditures, prices may have to shed some volatility and remain rangebound between $2.50 and $3.50 per million British thermal units (Btus). According to LSEG, gas prices are forecast to keep rising in 2025 amid stronger international demand.[iii] Yet natural gas has experienced wide price swings in 2024.

Extreme cold that struck the U.S. in January 2024 prompted gas to soar from $3.15 per million Btus on January 11, 2024, to $13.20 per million Btus on January 12, 2024, and then quickly back down to $3.25 per million Btus by January 16, 2024.[iv] Gas fell to $1.25 per million Btus by March 13. It stayed below $2.00 per million Btus from February to May and again in parts of July, August, October and November. On November 27, 2024, it reached $3.39 per million Btus.[v]

Tailwinds include the potential for large corporate consolidations that could lead to both carveouts and investors backing new energy teams, the potential opening up of the IPO market, and the expectation that the incoming U.S. presidential administration will pursue business-friendly regulatory and governance policies for the energy sector.[vi]^, [vii]^, [viii] While federal action alone is unlikely to spur a sustained widescale increase in oil & gas production – given that the U.S. already is the world’s largest crude oil producer – easier processes for steps such as acquiring land permits may boost energy production in the short-term.[ix]

Since exiting the pandemic, energy firms have exerted much more financial discipline than during the 2015 to 2020 time period, which was characterized by lower commodity prices, returns, and cash flows. Today, many upstream firms appreciate keeping healthy balance sheets and the ability to distribute cash flow to their shareholders, as reflected by leverage levels hovering near historical lows. The main measure of success for upstream companies remains production – albeit with attention to reserve levels, the mix of developed versus undeveloped reserves, and maintaining a shift from undeveloped to developed reserves.

These positive forces may be tempered somewhat by potential headwinds such as the prospect of weaker oil demand from China, an easier U.S. regulatory environment possibly coinciding with excessive drilling that also weighs on oil prices, gas price volatility widening the bid-ask spread, as well as geopolitical upheavals due to ongoing conflicts in the Middle East and Russia-Ukraine.

Deal Structures

Minority stake investments and joint ventures have occurred, but traditional buyouts have driven the bulk of transactions in 2024 and are poised to potentially do so in 2025. Many transactions have some level of stock as consideration as buyers seek to maintain balance sheets, share risk, align interests, or to keep sellers incentivized to perform.

Earnouts, seller notes, and other forms of contingent payments are now common features as buyers aim to increase their probability of success amid commodity price uncertainty, which is a fundamental aspect of the energy sector. The prevalence of these deal features may accelerate, along with increased levels of buyer rollover, if firms gain greater access to financing that facilitates M&A transactions in 2025.

Creative financing structures have appeared in the upstream and midstream spaces. For example, through the use of preferred equity, which combines elements of debt and equity in PE deals. The bank lending market also improved somewhat this year, as the higher interest rate environment that prevailed for most of 2024 made it the lowest cost debt option.

The higher rate environment and generally softer commodity prices caused a bit of a slowdown in the alternative debt markets. Unitranche lenders in particular struggled to put out capital in recent years. In response, spreads have tightened materially and covenants have gotten lighter in attempts for those lenders to put money to work. If that trend continues in 2025 and coincides with greater activity among unitranche financing and asset-backed securitizations (ABS), energy firms that access those structures could be better positioned to pursue growth initiatives.

In addition, continuation vehicles (CVs) have become attractive for older portfolio companies, which have seen limited partners (LPs) exit and family offices step in as the economics of the deal are reset. Since family offices are a relatively new force in the sector, those family offices that specialize in oil & gas or whose key personnel have long-term experience with energy may find the CV market easier to navigate than family offices that are still learning the space.

Some PE firms have portfolio companies that will pursue CVs, and other PE firms have dedicated new funds that target sources of capital for CVs. That combination of approaches indicates that the CV market has more room to potentially grow in 2025.

Stephens Energy

Stephens has been an active principal investor in the energy sector since the 1940s. Since its inception in 2009, the Stephens Energy Investment Banking Group has closed more than 225 transactions, representing approximately $66 billion in value. During the past five years, the team has closed nearly 65 transactions, representing approximately $18.6 billion in value.

The team’s 18 professionals cover the exploration and production (E&P), midstream and OFS spaces through M&A advisory, fairness opinions, and public and private debt and equity offerings. This includes working with private equity firms and family offices. The Financial Sponsors Group at Stephens covers more than 350 family offices.

In 2024, Stephens Energy was active across these categories, with significant deal flow in the upstream space, such as for working interest transactions as well as for companies focused on minerals and royalties. Stephens Energy is ready to continue innovating for all clients on the full range of services, from sell-side acquisitions and divestitures (A&D), to capital raising and credit transactions, throughout 2025 and beyond.

[i] Baker Hughes Rig Count, https://rigcount.bakerhughes.com, December 13, 2024

[ii] Crude Oil Prices: West Texas Intermediate (WTI) - Cushing, Oklahoma, Federal Reserve Bank of St. Louis FRED Economic Data, December 11, 2024

[iii] Key global natural gas prices set to keep rising into 2025, Reuters, December 3, 2024

[iv] US power and natgas prices soar as extreme freeze hits natgas supplies, Reuters, January 12, 2024

[v] Henry Hub Natural Gas Spot Price, Federal Reserve Bank of St. Louis FRED Economic Data, December 11, 2024

[vi] Energy: US Deals 2025 outlook, Energy Deals: Growing energy demand is impacting all sectors, PwC, December 14, 2024

[vii] IPO market slowing, but momentum builds for 2025 rebound, PwC, October 3, 2024

[viii] Under Trump, an 'all of the above' energy policy is poised for a comeback, NPR, December 9, 2024

[ix] United States produces more crude oil than any country, ever, U.S. Energy Information Administration, March 11, 2024