Energy – Oil and Gas

Global oil demand fell by 25% in April of 2020 and has since rebounded sharply, cutting its losses to just 8%. Moving forward, 2021 oil demand is expected to recover strongly but remain lower than it was at pre–COVID-19 levels—about 4% lower in the base case, and about 7% lower in Rystad Energy’s second-wave scenario. Similarly, oil prices and energy stocks have underperformed base metals and the broader S&P 500 index by about 10% and 25% and 6% and 10%, respectively, since July 2020. Mass layoffs and heightened cyclicality in employment continue to challenge the industry’s reputation as a reliable employer. US O&G companies laid off about 14% of permanent employees in 2020, and our research shows that 70% of jobs lost during the pandemic may not come back by the end of 2021.

With the survival of many companies at risk, and the longer-term decline in petroleum demand, the next decade could look very different for the entire O&G value chain. Starting off 2021 will either be a leapfrog year or a test of endurance for many. We see several trends that may challenge traditional methods of oil and gas production in 2021, determine the direction of the industry, and begin separating the pioneers from the followers.

COVID-19 greatly affected the Oil and Gas industry as demand for energy declined and revenues decreased substantially, leading to a pullback in capital spending and lower Mergers and Acquisitions M&A activity. Despite these challenges, 2021 could be a period of growth and transformation as companies push to boost margins, cut emissions, and prepare for the energy transition. Exhibit 1 shows the Energy – Oil & Gas sector’s performance since 2016 relative to the overall economy, comparing sector revenue change to GDP growth from 2016-3Q2020.

Compared with other segments, downstream saw less of a drop in deal value and volume, despite the turmoil in the fuel markets and the rapid shifts in refinery utilization and yields in the face of COVID-19. Perhaps unsurprisingly, out of the top five largest transactions, two primarily involved retail business, with the other three terminals, storage assets and non-targeted refineries.

The lack of large refining deals reflects a natural slowdown after several years of large-scale consolidation, as well as near-term market volatility and longer-term energy transition concerns. The International Energy Agency projects that 1.7 million barrels of refining capacity will be retired in 2020 and 2021. US refining earnings could fall by 20% over the next decade if lower throughput is not offset by lower costs, driven by reduced utilization in the near term by lower demand because of COVID-19 and in the long term by tighter fuel efficiency standards, electric vehicles, and export market competition.

Stress in the refining business could lead many downstream operators to invest more toward distribution and retail in a push to capture higher margins and increase market share. For example, some of the majors who had historically downplayed the space are now considering their retail footprint as a competitive advantage in a more customer-centric, digitally connected, and lower-carbon world. We expect that retail M&A could increase in 2021 and beyond as market participants work to develop business models that have a brighter future over the energy transition. Exhibits 2 show the trends in activity from 2015-2020.

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