When walking away is a win: The hidden risks in energy M&A

DUSTIN WILLIAMSON, MANAGING DIRECTOR, HOUSTON, vcfo  

In today's booming energy sector, the dealmaking frenzy shows no signs of slowing. With U.S. crude production projected to hit 13.5 MMbpd in 2025, and LNG exports expected to surge to 14 Bcfd, the conditions for mergers and acquisitions in oil and gas couldn't look more promising. Strong cash flows, increased shale basin consolidation, and growing investor interest in LNG infrastructure create a perfect storm for accelerated dealmaking.  

But as a CFO who has been on both sides of the transaction table across angel investments, venture capital, private equity, investment banking and strategic energy M&A, I've learned a critical lesson that often goes against the grain of deal euphoria: Sometimes, the best deal is no deal.  

The dangers lurking in due diligence. The most significant risks in energy M&A are rarely apparent at first glance. They're buried deep in the granular details of due diligence, which only reveal themselves when you've turned over every stone.  

Take the case of a midstream acquisition I once evaluated that appeared flawless on paper. The target company had steady cash flows, strategic pipeline assets, and seemingly robust contracts with producers. Only through exhaustive due diligence did we uncover that the target company had written all of its employee contracts with day rate calculations instead of hourly with overtime provisions. Nor did those contracts have class action-busting language to deal with the ramifications of labor attorneys, who seek out specific groups of people to join their class action crusades against oil field service companies.    

In today's energy landscape, these hidden risks multiply with its complex regulatory framework and the political uncertainties surrounding the IRA tax credits. The administration's January order to freeze regulatory rulemaking and the Executive Order on "Unleashing American Energy" add new layers of complexity that must be thoroughly analyzed before any deal proceeds.  

Post-acquisition headaches nobody warns you about. Even the most carefully structured energy deals can unravel during integration. Cultural misalignment between organizations can derail operations, especially in an industry where safety protocols and operational procedures are critical. 

I've witnessed technically sound acquisitions flounder when field operations teams couldn't reconcile different approaches to maintenance schedules, compliance documentation, or safety standards. The projected synergies quickly evaporated amid the operational chaos. This is one of the main reasons that it is usually an uphill battle to get a strategic buyer, or even more difficult, a private equity-backed strategic buyer pays much for anticipated synergies. These synergies, no matter how logically conceived, rarely materialize.  

Then there's the issue of talent retention. In specialized fields like oilfield services or LNG terminal operations, a company's value often disappears when key personnel leave post-acquisition. The best financial models can't account for the exodus of institutional knowledge when integration efforts fail to engage critical personnel. 

Lessons from failed deals. The most valuable lessons I've learned came from transactions that never closed—or those that should never have closed. 

In the acquisition I mentioned above, we were prepared to move forward with the pipeline services company, had it not been for the day rate contracts. The financials looked promising, but the workforce loved the day rates and preferred them. Converting them would have been a circus, where the workforce could have easily walked to competitors if we completely rewrote the employment agreements. After bringing in specialized technical labor attorneys for an additional review to see if we could protect ourselves from predatory lawyers seeking damages for undocumented (reimagined in hindsight) overtime violations, we walked away from the deal. Two years later, that company was eaten alive by a class action lawsuit. Walking away from that deal saved money, years of legal headaches and potential reputational damage. 

This experience reinforced what I now consider a cardinal rule: when data points conflict during due diligence, dig deeper rather than rationalize discrepancies. In energy M&A, technical uncertainties rarely resolve in the buyer's favor after closing. 

Navigating 2025's shifting political and regulatory landscape. The energy sector in 2025 faces a uniquely complex political and regulatory environment. With Republican control promising to lift restrictions on traditional energy production and potentially slow decarbonization efforts, conventional fossil fuel assets may see valuation increases. Simultaneously, IRA tax credits make renewable energy projects financially attractive, creating a two-track market. 

This bifurcated landscape creates both opportunity and risk. Buyers must carefully evaluate how regulatory changes affect asset values and operational freedom. Will a target company's permits maintain value under a new regulatory regime? How stable are the tax incentives supporting project economics? 

The January executive order freezing all regulatory rulemaking, including consideration for a 60-day delay in the effective date of recently published rules, could significantly impact the renewable sector. Similarly, the moratorium on approvals for wind projects creates uncertainty that must be factored into valuations. 

The courage to walk away. In an industry awash with capital and eager buyers, the test of dealmaking discipline is knowing when to walk away. This isn't about fear or excessive caution but rigorous analysis and strategic clarity. 

The most successful energy executives I've worked with share this quality: they're as willing to abandon a flawed deal as they are to champion a promising one. They understand that in the high-stakes world of energy M&A, sometimes the most significant victory is avoiding a costly mistake. 

As we navigate the promising-but-complex energy M&A landscape of 2025, remember that in the long run, companies are defined not just by the deals they make but also by the problematic ones they avoid. In the words I've come to live by in my years steering financial strategy, “sometimes the best deal is no deal at all.” 

DUSTIN WILLIAMSON is a forward-thinking CFO with extensive experience in M&A across angel investing, venture capital, private equity, investment banking, and strategic energy transactions. He currently serves at vcfo, providing integrated finance, HR and recruiting support to help companies optimize performance and productivity.