Why Is Oil & Gas M&A Activity Declining in 2025?
The oil and gas sector is witnessing a dramatic transformation in merger and acquisition activity, with US upstream dealmaking plummeting 60% in the first half of 2025 to just $30.5 billion compared to the same period in 2024. This significant decline unfolds against a backdrop of extraordinary price volatility, with Brent crude fluctuating between $57 and $75 per barrel in Q2 2025 alone—creating both challenges and opportunities throughout the industry.
"Volatility in commodity and equity markets raised a major yellow flag for M&A, slowing the pace of dealmaking. That added an additional barrier to a market that was already challenged by the lack of remaining attractive opportunities," according to Andrew Dittmar of Enverus, a leading energy data analytics firm tracking the sector's consolidation trends.
What Factors Are Driving the M&A Slowdown?
Price Volatility and Market Uncertainty
The unpredictable price environment has created a significant valuation disconnect between buyers and sellers. With oil price trade movements swinging dramatically within short timeframes, potential acquirers have become increasingly hesitant to commit to large transactions that could quickly become underwater if commodity prices shift adversely. This uncertainty has particularly affected deals in premium basins like the Permian, where high asset valuations—often 5-7x EBITDA compared to historical averages of 3-5x—leave minimal margin for error in acquisition strategies.
According to Reuters' July 2025 analysis, the bid-ask spread between potential buyers and sellers has widened to nearly 20% in some premium basin negotiations, creating an effective stalemate in transaction activity.
Supply-Demand Imbalance
Current market fundamentals show global oil supply growth of 1.8 million barrels per day in 2025, substantially outpacing demand growth of just 700,000 barrels per day, according to the International Energy Agency's Oil Market Report (July 2025). This growing oversupply creates persistent downward pressure on prices and raises fundamental questions about the long-term value proposition of acquisitions made at current valuations.
The supply surplus provides a buffer against geopolitical shocks but complicates investment decisions for producers contemplating long-term capital commitments. China's energy security policies have further complicated global markets by "removing volumes from the global market," as highlighted in the IEA's assessment, creating additional uncertainty for market participants.
Reduced Availability of Premium Assets
After several years of intense consolidation activity, particularly in North American shale plays, the inventory of high-quality available assets has diminished significantly. Major players have already secured positions in the most productive basins, leaving fewer compelling acquisition targets that meet strategic and financial criteria for potential buyers.
The remaining opportunities often come with significant technical, infrastructure, or environmental challenges that require specialized expertise to resolve—narrowing the pool of potential acquirers who can extract maximum value from these assets.
Rising Cost of Capital
Financing conditions have tightened considerably for potential acquirers, with higher interest rates and more stringent lending requirements affecting deal economics. Senior secured debt now typically commands 150-200 basis points more than comparable financing packages in 2022-2023, according to industry financing specialists.
This increased cost of capital has made marginal acquisitions significantly less attractive and forced companies to be more selective in their approach to growth opportunities. Private equity firms, once reliable sources of acquisition capital, have also become more cautious in their deployment strategies, extending holding periods and focusing on operational improvements rather than quick exits.
How Are Market Dynamics Changing for Producers?
Enhanced Capital Discipline
Leading oil and gas operators have implemented rigorous return thresholds, typically requiring 10-15% internal rates of return (IRR) for new projects—a significant shift from previous industry practices that often prioritized production growth over financial returns.
Shell, for example, has streamlined its operational focus from over 70 targets to just eight key metrics, contributing to structural cost reductions with targeted operational expenditure savings of $5-8 billion between 2022 and 2028. This focus on capital discipline has fundamentally altered how companies approach both organic growth and acquisition opportunities, prioritizing value over volume.
Operational Efficiency Improvements
The industry has made remarkable progress in reducing breakeven costs through technological innovation and operational optimization. Major producers now plan expansion projects with average breakeven costs around $35 per barrel, providing resilience against oil price crash insights while maintaining attractive margins across various price scenarios.
These efficiency gains derive from:
- Advanced digital technologies for reservoir monitoring and production optimization
- Standardized well designs and modular development approaches
- Integrated supply chain management reducing equipment and service costs
- Enhanced drilling techniques minimizing non-productive time
This focus on efficiency extends to environmental performance, with many operators prioritizing assets that produce lower CO2 emission barrels—a strategic advantage as carbon pricing mechanisms expand globally.
Natural Gas Liquids as Growth Driver
Natural gas liquids (NGLs) have emerged as a significant growth segment within the industry. Global NGL production is forecast to increase by 2 million barrels per day to reach 15.5 million barrels per day by 2030, driven primarily by rising petrochemical feedstock demand.
Recent IEA data shows NGL inventories increasing by 79 million barrels in Q2 2025 alone, highlighting the sector's robust growth trajectory. This opportunity is particularly attractive as it aligns with broader energy transition trends while leveraging existing production capabilities and infrastructure.
Companies with integrated operations across the NGL value chain—from production through fractionation to petrochemical integration—are positioned to capture higher margins than pure upstream players focused solely on extraction.
What Opportunities Exist in Unconventional Resources?
Australian Gas Basin Developments
Significant technical achievements in Australian unconventional gas regions demonstrate the commercial viability of new supply sources. In the Beetaloo Basin, Beetaloo Energy (formerly Empire Energy) has successfully completed record-breaking well stimulations, including a 2,955-meter horizontal section with 67 fracture stages—a technical milestone validated through ASX disclosures that signals the potential of previously untapped resources.
Initial flow testing results from these wells are anticipated by September 2025, potentially confirming commercial flow rates that could establish the Beetaloo as a globally significant gas province. These developments highlight how technical innovation continues to unlock resources previously considered inaccessible or uneconomic.
Infrastructure Advantages
Emerging production regions that benefit from existing infrastructure enjoy significant competitive advantages in terms of development costs and time-to-market. The Taroom Trough in Queensland, for example, benefits from proximity to the Wallumbilla Gas Hub and established pipeline infrastructure, providing direct access to undersupplied East Coast energy markets and approximately 25 million tonnes per annum of LNG liquefaction capacity.
This infrastructure advantage translates to:
| Development Factor | Greenfield Region | Infrastructure-Adjacent Region |
|---|---|---|
| Time to First Production | 3-5 years | 12-24 months |
| Capital Intensity | $5-7/mcf | $2-3/mcf |
| Breakeven Price | $4.50-6.00/mcf | $2.75-3.50/mcf |
| Regulatory Timeline | 24-36 months | 12-18 months |
These fundamental advantages make infrastructure-adjacent developments particularly attractive in volatile market environments, offering reduced capital exposure and faster payback periods.
Strategic Development Plans
Forward-thinking operators are implementing phased development strategies to secure long-term value from unconventional resources. Elixir Energy's approach in the Taroom Trough exemplifies this strategy, with a clearly defined pathway:
- Initial exploration and appraisal to validate resource quality and extent (2023-2024)
- Pilot production testing to confirm commercial flow rates (2024-2025)
- Contingent resource certification to establish 2C resources of 2.6 TCFe (2025)
- Development drilling and infrastructure installation (2026-2027)
- Commercial production targeting East Coast markets (2027+)
Companies with clear pathways to commercialization are attracting investor interest despite the broader market slowdown, particularly when these pathways leverage existing infrastructure and target premium markets with structural supply shortages.
How Are Companies Positioning for the Energy Transition?
Commercial Realism Approach
Leading oil and gas companies are adopting a "commercial realism" approach to energy transition investments, requiring competitive returns on low-carbon projects rather than pursuing transition activities based solely on environmental considerations.
Shell's approach exemplifies this balanced strategy, applying the same rigorous 10-15% IRR thresholds to renewable energy and carbon reduction projects as it does to traditional hydrocarbon developments. This disciplined investment approach ensures sustainable participation in evolving energy markets without sacrificing current cash flows or shareholder returns.
The commercial realism perspective recognizes that energy transition will occur over decades rather than years, necessitating continued investment in efficient hydrocarbon production while gradually building capabilities in emerging energy systems.
Strategic Infrastructure Repurposing
Existing assets and infrastructure provide opportunities for participation in emerging energy markets. Shell's retail network of over 45,000 service stations globally represents a strategic platform for electric vehicle charging deployment, utilizing established customer relationships while adapting to changing mobility patterns.
Industry analysis indicates that EV customers tend to have higher non-fuel purchases per visit, partially offsetting different usage patterns compared to traditional fuel customers. This trend has prompted Shell to implement a "time-fill" strategy in European markets, integrating premium retail offerings with EV charging services to maximize overall site economics.
Similar opportunities exist for repurposing:
- Gas processing facilities for hydrogen production
- Pipeline networks for CO2 transport (CCUS applications)
- Offshore infrastructure for wind development
- Trading capabilities for carbon market participation
These repurposing strategies leverage existing competencies and assets while positioning for future energy system evolution.
Integrated Business Models
Companies with diversified operations across the value chain demonstrate greater resilience to price volatility while maintaining upside exposure when market conditions improve. Downstream, trading, and retail operations often operate largely independently of oil price fluctuations, providing stability during periods of market uncertainty and supporting consistent shareholder returns.
Shell's 14 consecutive quarters of share repurchases exceeding $3 billion demonstrate the cash generation potential of integrated models, even during periods of commodity price volatility. These repurchases have reduced outstanding share count by approximately 22%, significantly enhancing per-share metrics for long-term investors.
This integrated approach allows companies to weather market downturns while continuing to invest selectively in high-return opportunities across the energy spectrum—from traditional oil and gas to emerging low-carbon technologies.
What Investment Opportunities Does the M&A Slowdown Create?
Value Creation Through Reduced Competition
The decline in acquisition activity has reduced competition for assets and potentially created value opportunities for well-positioned companies. With fewer buyers in the market, patient operators with strong balance sheets can potentially secure attractive assets at more favorable valuations than would have been possible during periods of intense M&A activity.
These opportunities are particularly evident in:
- Mid-tier assets in established basins facing operational challenges
- Infrastructure-adjacent resources requiring specialized technical solutions
- International opportunities with higher perceived risk profiles
- Assets requiring reconfiguration to address environmental performance issues
Companies that maintain financial flexibility while developing specialized capabilities to address these challenges can potentially create significant value through counter-cyclical acquisitions.
Enhanced Shareholder Returns
Many producers are using their strong cash flow generation to implement aggressive shareholder return programs rather than pursuing acquisitions at potentially inflated valuations. Leading companies have maintained consistent share repurchase programs over multiple quarters, significantly reducing outstanding share counts and enhancing per-share metrics for long-term investors.
Shell's 14 consecutive quarters of share repurchases exceeding $3 billion exemplify this approach, reducing outstanding share count by approximately 22% since 2022. This strategy effectively allows investors to participate in the company's intrinsic value growth while avoiding the integration risks associated with major acquisitions.
For investors, these shareholder return programs offer:
- Immediate value realization compared to uncertain acquisition outcomes
- Tax-efficient wealth transfer compared to dividends in many jurisdictions
- Reduced share count enhancing per-share metrics over time
- Disciplined capital allocation signaling management quality
Strategic Bolt-on Acquisitions
While transformational mergers have declined, targeted smaller acquisitions that complement existing operations continue to offer attractive returns. These strategic bolt-on transactions typically involve assets in close proximity to current production, allowing operators to leverage existing infrastructure and operational expertise to create value.
Successful bolt-on strategies often focus on:
- Contiguous acreage allowing for extended lateral drilling
- Filling infrastructure capacity gaps to optimize utilization
- Accessing complementary production streams (e.g., adding liquids-rich gas to an oil-focused portfolio)
- Consolidating operatorship to streamline decision-making
These focused transactions can create significant value without the integration challenges and execution risks associated with transformational mergers.
What Are the Long-Term Implications for the Oil & Gas Sector?
Sustainable Business Models
The industry's enhanced focus on capital discipline, operational efficiency, and shareholder returns is creating more sustainable business models that can thrive across commodity price cycles. This evolution addresses historical performance issues that previously justified valuation discounts and positions leading operators for long-term success despite energy transition uncertainties.
Key elements of these sustainable models include:
- Low breakeven costs providing resilience in volatile price environments
- Disciplined capital allocation prioritizing returns over growth
- Balanced shareholder return strategies combining dividends and repurchases
- Targeted low-carbon investments maintaining optionality for future transitions
These characteristics allow companies to deliver competitive returns throughout market cycles while gradually adapting to evolving energy market structures.
Consolidation Among Mid-tier Producers
As premium acquisition opportunities become scarcer, mid-tier producers may increasingly look to combine operations to achieve scale economies and enhance competitive positioning. Recent activity in Canada's Montney Basin exemplifies this trend, with several mid-sized producers exploring combination opportunities to create platforms with sufficient scale to attract institutional capital.
These consolidation opportunities could create new investment platforms with sufficient scale to attract institutional capital while maintaining operational agility. Successful mid-tier consolidations typically focus on:
- Complementary asset portfolios enhancing overall resource quality
- Operational synergies reducing unit costs across the combined entity
- Enhanced capital market access through increased scale
- Improved infrastructure utilization driving margin expansion
For investors, identifying potential consolidation candidates before formal processes begin can provide significant value creation opportunities.
Balanced Energy Transition Participation
The sector's approach to energy transition emphasizes commercial viability over ideological positioning, creating sustainable pathways for traditional operators to participate in evolving energy markets. This balanced strategy recognizes the continuing importance of conventional energy sources while positioning for gradual shifts in the global energy mix.
Leading companies are pursuing transition strategies that:
- Apply consistent return thresholds across all investment opportunities
- Leverage existing capabilities and infrastructure where possible
- Target segments where traditional energy expertise provides advantages
- Maintain portfolio optionality to adjust as technology and policy evolve
This pragmatic approach allows companies to participate in energy transition while continuing to generate attractive returns from traditional operations—a balance that increasingly resonates with investors seeking both current income and future-proofed business models.
FAQ: Oil & Gas M&A Decline in 2025
Will M&A activity recover in the second half of 2025?
Industry analysts expect M&A activity to remain subdued through the remainder of 2025 unless commodity price volatility subsides significantly. Any recovery would likely be gradual rather than immediate, with transaction volumes potentially increasing in 2026 as market conditions stabilize.
The IEA's projections for continued supply growth exceeding demand through at least Q1 2026 suggest that price volatility may persist, maintaining the challenging environment for dealmaking. Specific catalysts that could accelerate recovery include:
- Sustained period of price stability creating valuation consensus
- Significant production declines in major basins improving supply-demand balance
- Material cost reductions in financing or development costs
- Strategic shifts by major players creating cascade effects
Which regions are most affected by the M&A slowdown?
North American upstream assets, particularly in the Permian Basin, have experienced the most pronounced decline in transaction activity. Deal volume in the Permian declined approximately 75% year-over-year in H1 2025, compared to a 60% decline across all U.S. basins, reflecting the basin's premium valuations and advanced consolidation stage.
International markets have shown greater resilience, with continued interest in assets that offer strategic advantages or exposure to growing demand centers. Specifically:
- Southeast Asian gas assets targeting regional LNG demand
- Middle Eastern projects with structural cost advantages
- West African developments with European market access
- Australian gas resources with proximity to Asian markets
This divergence reflects the different consolidation stages and competitive dynamics across global production regions.
How are private equity firms responding to the changing M&A landscape?
Private equity investors are adjusting their strategies to focus on operational improvements and cash flow generation rather than quick exits through sales to public companies. Many are extending their investment horizons and exploring alternative monetization pathways, including potential public listings when market conditions improve.
Specific adaptations include:
- Consolidating portfolio companies to create scale
- Investing in operational capabilities rather than relying on financial engineering
- Developing standalone marketing strategies for portfolio companies
- Pursuing strategic partnerships with public companies rather than outright sales
- Extending fund lifecycles to accommodate longer holding periods
These adaptations reflect the challenging exit environment while maintaining focus on ultimate value realization for limited partners.
What metrics are most important for evaluating oil & gas investments in the current environment?
Free cash flow yield, breakeven costs, balance sheet strength, and shareholder return policies
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