How ESG is Changing Oil and Gas M&A Evaluations

April 27, 2022

Four oil and gas experts debated how ESG is changing mergers and acquisitions in the industry, at a panel discussion hosted by the Society of Petroleum Engineers on April 20, 2022. ESG Dynamics was delighted to sponsor the event, because environmental benchmarking has become critical in deal evaluation. The session outlined many issues that demand rapid data analysis, such as an ESG-focused A&D evaluation workflow using our Energy Module Explorer.

Contact us at info@esg-dynamics.com to learn how the workflow or our consultants can accelerate your next transaction.

 

Panelists for “The Quickly Evolving World of ESG in Oil and Gas M&A”:
•  Mark Sooby, Managing Director, Lazard
•  Trina Engels, ESG & Sustainability Director, New Tech Global
•  Chris Micsak, Director, Pickering Energy Partners
•  Krish “Ravi” Ravishankar, Director Worldwide Environmental Affairs, Oxy

 

Investors are showing renewed interest in oil and gas, with some returning to the sector as financial returns improve. With the recognition of ESG risk factors, operators need to report data to keep existing investors and access new capital.

 

It's clear that all oil and gas companies should start the ESG journey, but the intensity level depends on the size and type of firm. Operators need to determine what is material to their business and stakeholders. With a vast range of ESG issues facing the industry, it’s impossible to focus on everything at once.

 

Differences for public and private companies

Stakeholders expect public companies to collect and disclose ESG metrics. They also want operators to set targets for improvement, even for those without Net Zero goals. Most of the requested data already exists somewhere within company files, so greenhouse gas calculations are the primary challenge.

 

Private companies are not exempt. Large institutional investors are pressuring sponsors for ESG improvements by portfolio companies. Moreover, some reinsurers now require insurers and lenders to address ESG risks for underwriting. Private firms will be benchmarked against peers, for environmental performance, data collection and social policies like safety, diversity and human rights. 

 

Private operators planning an exit must recognize what public companies track then align, if they hope to close a sale. Buyers now look hard at ESG, weighing how to value, internalize and manage risks presented by new assets.

 

Changes to the M&A evaluation process

Environmental due diligence is nothing new for merger and acquisition evaluations. But over the last five years, ESG has gained a very significant role in the process and could prove pivotal to a transaction decision. Historically, due diligence focused on regulatory compliance.

 

Now climate-related risks and societal impact factor into the equation, as part of the enterprise risk management system. 
Idled wells, for example, now get rigorous attention in the deal evaluation. Traditionally, plugging costs were largely ignored, modeled far into the future. Now buyers consider liability and factor in costs to address abandoned wells and DUCs.

 

Business development groups must learn to financially quantify ESG issues, modeling non-technical risks and opportunities into the valuation. Future evaluations will go beyond simply flagging concerns, to estimating ESG-related costs and investigating new benefits like carbon credits or sequestration potential. Companies that leverage ESG value will find profitable deals.

 

Putting ESG at the forefront of the deal

ESG analysis has moved to the start of deal evaluations, as buyers look for assets that fit their business models and enhance their ESG goals. Early desktop reviews scrutinize environmental footprint or violations even before visiting a data room. Companies with reporting gaps, litigation or major social concerns may be quickly eliminated.

 

Empowered by cloud-based data analytics, our A&D evaluation workflow provides rapid transaction screening based on a company’s ESG goals and metrics. Buyers can filter and identify potential target assets then visualize the combined portfolio across a range of production and environmental measures.

 

Similarly, sellers could benchmark their environmental footprint against potential buyers. A desktop self-review would identify data gaps or performance problems before going to market. With this knowledge, forward-looking sellers may align operational best practices to become more attractive to prospective buyers.

 

Case study: Penn Virginia and Lonestar Eagle Ford simplified evaluation workflow

Filter, identify and select potential candidates based on complementary location and production.  

 

Visualize the combined portfolio environmental performance based on flaring, gas use, greenhouse gas emissions, spills and other essential metrics.

 

Pinpoint inactive wells to calculate P&A liability and costs.

 

Quantify operational concerns like GHG emissions sources needing mitigation, to estimate ESG-related costs for valuation models.

 


Do you need to accelerate your M&A evaluations? Looking for acquisition candidates with ESG metrics that fit your portfolio? Need help benchmarking and preparing assets for sale? Searching for techniques to improve your operations toward your ESG goals? 

 

ESG Dynamics provides the data and guidance you need at every stage of your journey in the oil and gas industry.

Contact us at info@esg-dynamics.com.


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