DALLAS — A consolidating energy market has public companies racing to keep up amidst rising pressure.

Companies have to make a decision: Either make deals with a shrinking pool of opportunities or face growing irrelevancy, said David Deckelbaum, managing director of energy transition & sustainability for analytical firm TD Cowen at Hart Energy’s A&D Strategies and Opportunities Conference on Oct. 23.

“There's logically not that many places to look for value creation,” Deckelbaum said. “And I think that arbitrage goes away, yet it presents an interesting problem of what do you do right now, as a public operator?”

There’s only a handful of E&Ps with a market cap higher than $25 billion. Staying competitive with other major publics requires executives to look for ways to keep adding to their market cap. Over 2023 and 2024, the value of E&P deals neared $300 million. At the same time, the number of deals decreased to lows not seen over the last decade, with just over 200 each year.

“They have to continue finding ways to bolt on to that cap creatively in order to stay relevant with the broader market,” Deckelbaum said. “Not just energy banks, but to stay broadly relevant with generalist investors who are looking at the S&P index as their benchmark.”

Energy companies currently make up about 3% of the S&P, and investors are therefore comparing oil and gas E&Ps with the other broad sectors of the economy. The result has been that the energy market, while strong, tends to bring in money from people who are going to limit the percentage of funds they place in it.

“When people ask me if investors are bullish on E&P or the energy industry in general right now, I say they might be bullish, but they are going to buy one name,” he said.  

The state of the market has caused some non-intuitive trends. Deckelbaum pointed out that natural gas-weighted deals have outpaced oil-weighted deals by 20% so far in 2024. Yet the U.S. is awash in natural gas, and prices have been below $3/MMBtu for all of 2024 except for a short period in June. For the most part, natural gas companies have flattened or pulled back on production.

Even so, investors are attracted by the gas market’s current growth and potential growth in the future.

“People have really adhered to this long-term dynamic of demands growth,” Deckelbaum said.

Natural gas demand has increased by about 2 Bcf/d over the last few years, he said, as the international LNG market has grown and electric utilities seek to end their coal consumption. A rapid build-out of data centers for artificial intelligence servers is expected to rely heavily on gas-fired power generation.

“Investors generally think, even if that is a long-term compound annual growth rate of 2%, that's still a lot better than 0% on the oil side,” he said.

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