The exploration and production (E&P) industry is expected to be shaped by efficiency improvements, mergers and acquisitions (M&A) and shifting commodity trends in 2025, analysts at Citi believe.
In their 2025 sector outlook, the analysts wrote that despite significant operational advancements in 2024, E&P equities struggled to differentiate themselves, overshadowed by crude price concerns and broader market dynamics.
Reduced drilling costs, enhanced productivity, and operational optimization led to efficiency gains in 2024. Companies like Devon Energy Corp (NYSE:DVN, ETR:DY6) and Ovintiv demonstrated notable cost improvements, but market rewards remained muted due to competitive adoption of similar advancements across the industry.
Analysts expect continued operational refinements in 2025 but noted that these alone are unlikely to drive significant equity upside without clearer differentiation.
Strategic M&A remained a dominant theme in 2024, with high-profile deals like Diamondback Energy Inc (NASDAQ:FANG, ETR:7DB)’s acquisition of Endeavor Energy Resources and ConocoPhillips (NYSE:COP, ETR:YCP)’ purchase of Marathon Oil Corp (NYSE:MRO).
For 2025, Citi anticipates further consolidation, particularly among mid-cap companies like Permian Resources and Chord Energy, as they focus on bolt-on acquisitions and portfolio enhancements. Smaller operators such as Vital Energy could become attractive acquisition targets, the analysts added.
Natural gas-focused operators outperformed their oil-weighted peers in 2024, buoyed by improved demand expectations and a narrowing cost of capital.
Citi sees further upside in gas prices for 2025, supported by increasing liquified natural gas export demand and domestic production growth. However, oil markets face potential oversupply challenges, creating a cautious outlook for oil-heavy E&Ps.
Top E&P picks for 2025
Citi wrote that investor sentiment toward the energy sector may improve in 2025 driven by a slower energy transition and potential policy shifts under a favorable business climate.
They noted that over the past few weeks, investors have brought forth questions regarding whether it is time to own energy again.
“The impetus for the inquiries appears to be a belief that the longer-term outlook for hydrocarbons could be improving under a slower energy transition and a view that the business climate for oil and gas will improve under Trump 2.0,” they wrote.
“Could these factors drive a lower cost of capital and upside to energy equities? Midstream performance in 2024 suggests that the answer is yes.”
They added that while midstream companies have already benefited from this trend, oil E&Ps require a more positive risk/reward outlook on crude prices to catalyze broader investor engagement.
The bank’s analysts highlighted several companies with unique propositions and strategic positioning as their top picks for the New Year.
A standout is BKV Corporation, which plans to expand its Texas power footprint and integrate carbon capture and storage solutions.
Among mid-caps, the analysts favor Permian Resources Corporation and Chord Energy Corporation for their operational improvements and M&A potential. They also see larger operators like Ovintiv and Coterra Energy Inc (NYSE:CTRA) as well-positioned to capitalize on deal synergies and enhance inventory life.