Portfolio rebalancing in downstream energy:

Balancing disruption with opportunity

The downstream energy sector is experiencing seismic shifts as it navigates a perfect storm of disruption. From changing consumer behaviours to varying regulatory frameworks and rapid technological advancements, the landscape is fundamentally transforming.

For companies operating in this space, portfolio rebalancing strategies such as mergers, acquisitions, divestitures, consolidation, new partnerships, and joint ventures (JVs) have become a critical tool for adapting to these changes and creating long-term resilience.

As traditional business models face growing pressure, organizations are adopting rebalancing strategies to reposition themselves as diversified energy companies. This marks a significant change in the competitive landscape.

Historically, refiners would compete with one another. Today, refiners compete with chemical and utility firms as the push to diversify drives investments in low-carbon fuels (LCF), hydrogen, and carbon capture & utilization (CCU).

In this article, we explore four evolving portfolio rebalancing trends in the downstream energy industry and how leaders can harness these changes to drive growth and innovation.

#1 Refining shifts for cost optimization

Refiners are planning capacity cuts for 2025, as well as strategically closing or selling less profitable refineries to focus on core, high-performing assets. In some cases, they’re partnering with Private Equity firms to do so. These strategic shifts are driven by regulatory pressure and weaker profit margins¹.

For example, the bid to purchase US-based refiner, Citgo, was previously awarded to an affiliate of private equity group, Elliott Investment Management for $7.286bn². However, regulatory challenges persist and the bidding process resumed in January 2025³.

Top U.S. refiner, Marathon Petroleum said it would operate its 13 refineries at 90% of their combined crude intake capacity which is down from 97% of capacity last quarter. And, Valero Energy, second-largest U.S. refiner, plans to reduce its processing rate due to plant maintenance and soft margins⁴.

#2 Chemicals as a catalyst for value

Large integrated energy companies have been using petrochemicals as a value engine for the last several years. Companies like ExxonMobil⁵ and Shell⁶ have transformed their downstream organizations to streamline operations, combine technology advantages, and centralize support services between refining and chemicals. These updated crude-to-chemicals business models help reduce costs and improve performance in downstream.

Today, petrochemicals can be a strategic play allowing pure refiners as well as large scale energy companies to balance evolving demand for traditional fossil fuels and enhance the returns in downstream.

This is illustrated in examples like Motiva’s acquisition of Flint Hills’ Port Arthur Chemical Plant⁷. This acquisition was the establishment of Motiva into the chemicals industry. Motiva Enterprises was already operating North America’s largest refinery in Port Arthur, Texas and the ability to leverage the feedstocks coming from the refinery in the new chemical plant was an integral part of the transaction.

This evolving landscape continues to push downstream energy players to transform. The growing demand for electric vehicles, shifting geopolitical policies and regulations, fluctuating demand and margins continually push refining organizations to forge new paths to reduce costs and capture value in innovative ways.

We expect to see investments made through partnerships and acquisitions in the chemicals space to be a key pillar for strategic returns in 2025 and beyond.

#3 Fuels retail consolidation for resilience and operational scale

The fuels retail industry is becoming increasingly consolidated, as players seek to optimize their portfolios and create economies of scale. Fuel retailers are integrating assets across regions and business segments to weather volatile market conditions.

For example, Casey’s General Stores announced a $1.1 billion acquisition of Fikes Wholesale, enhancing its distribution network and geographic footprint⁸. Also, Alimentation Couche-Tard’s (TSX:ATD) recent bid for GetGo Café + Markets for $1.6 billion⁹ highlights the strategic push to expand and streamline operations. And, ATD’s ambition to expand its retail presence is furthered by its attempt to acquire Seven & i Holdings, the owner of the 7-Eleven convenience store chain¹⁰.

Consolidation is driven by the need to counteract declining global margins, which fell below their five-year averages in 2024, coupled with increased regulatory pressures and changing demand for traditional fuels and customer needs¹¹.

By integrating downstream operations, companies are achieving greater efficiency and diversifying revenue streams to offset shrinking margins.

#4 Strategic investments and partnerships in renewables

As the energy transition accelerates, biofuels and renewables are emerging as pivotal areas of focus. Regulatory incentives like California’s Low Carbon Fuel Standards¹² and the federal Inflation Reduction Act¹³ are pushing companies to adopt and develop low-carbon solutions in the US, sparking a wave of transaction activity in this space. For example, this year, Neste invested in and commissioned terminal capacity in Houston to boost the US’ supply of sustainable aviation fuel (SAF)¹⁴, indicating a trend that will likely continue as the downstream energy industry evolves.

Biofuels, overall, are becoming an essential component of the energy mix, with their share of total distillate fuel oil consumption in the U.S. rising from 4% in 2020, to 7% in 2023 and as of October 2024, a projected at 9% total for the year¹⁵. This includes renewable diesel which has tripled from ~70,000 barrels per day (b/d) to 240,000 b/d in 2024. Companies are investing in biofuel production capabilities not only to comply with regulations but also to capitalize on growing consumer demand for sustainable energy alternatives. For example, bp’s acquisition of its Brazilian biofuels JV by acquiring Bunge’s 50% stake, unlocking synergies and driving growth¹⁶.

Additionally, many organizations are forming JVs and partnerships to tackle the uncharted territory in low carbon solutions such as hydrogen production and renewable energy infrastructure development. These collaborations allow companies to share risk, costs, and resources to accelerate and diversify their services and offerings.

A great example is The Houston Hydrogen Hub¹⁷, a shared industrial cluster, comprised of non-profit research organizations, academia, and leading energy companies, working to advance the clean hydrogen ecosystem in Texas and the U.S. Gulf Coast. With more than 1,000 miles of dedicated hydrogen pipelines, and 48 hydrogen production plants, the Gulf Coast is already the nation’s largest hydrogen producer. The Houston Hydrogen Hub demonstrates how collaborative efforts can lower costs and create scalable solutions for low-carbon energy production.

Also, ExxonMobil recently announced their plan to pursue up to $30 billion of low emission opportunities between 2025 and 2030 with an expected earnings growth of $2 billion in 2030 versus 2024. These investments include developing the world’s first large-scale carbon capture and storage system, which includes a high-capacity CO2 pipeline network connecting emitters from many industries to permanent subsurface storage capacity throughout the U.S. Gulf Coast¹⁸.

The emergence of such investments and partnerships underscores the industry’s recognition that achieving top results requires collective action. However, it remains to be seen how the Trump administration will impact the renewables investment trend, as IRA incentives may or may not be repealed, despite the benefit they provide to conventional energy companies investing in the future.

Expect energy companies to continue embracing collaboration and partnerships to share investment, risks, and scale these technologies for the inevitable energy transition.

Challenges and risks in the M&A landscape

While M&A presents significant opportunities, it is not without its challenges. Falling oil demand and weak refinery margins have created valuation complexities, making it difficult to secure favorable terms for deals. Additionally, disappointing returns from biofuel investments highlight the importance of rigorous due diligence and strategic alignment. New leaders in place at the US Department of Justice and Federal Trade Commission will also shift the regulatory landscape.

To navigate these hurdles, companies need to adopt a disciplined approach to M&A, focusing on deals that align with long-term strategic objectives and offer clear pathways to value creation.