What motivates merger and acquisition activities in the upstream oil & gas sectors in the U.S.?

- Our study finds evidence of waves in M&A activities in the upstream sector of the U.S. O&G industry.
- Aggregate stock market performance is not statistically correlated with M&A activities.
- The oil price is highly correlated with M&A activities.
- M&A activities were closely related to O&G output growth during 2004-2013.

The U.S. oil and gas (O&G) industry has experienced a tremendous amount of growth in the last decade or so due to the development of horizontal drilling and fracking technology. In the meantime, the industry has experienced heavy merger and acquisition (M&A) activity, especially in the upstream sectors. While these M&A activities may be related to the aggregate M&A waves in the country, they are unique in their own respect. We recognize that the M&A activities in the energy industry in general, and the O&G sectors in particular, can be different from the traditional sense of M&A activities. In this paper, we provide some stylized facts on the M&A patterns in the upstream O&G sectors, focusing on the factors that influenced these patterns. Our empirical evidence suggests that among the variables we studied, oil price and O&G production are the most important factors that influence M&A activities, while other variables do not show consistent effect across regions and definitions of M&A. In addition, the M&A activities had momentum-building periods and had patterns consistent with a wave hypothesis. Our findings support the notion that industry-specific factors are more important than general economic conditions in determining M&A in the O&G industry. We find evidence supporting both the behavioral and neoclassical theories on M&A.