America in Transition: Could Oil & Gas Merger Arb Be an Impact Strategy?

The Merger Arb Angle: Betting on Trump-Era Regulation

In a recent piece, Bloomberg’s Matt Levine suggested that there were two ways to view merger arbitrage. One view frames it as a “skill game,” where hedge funds buy into deals they believe will close and avoid the ones that won’t. This strategy thrives on uncertainty; the more variability in the market, the greater the opportunity for the skillful arbitrageurs to capture mispricings by “reading the tea leaves” of regulatory challenges.

The second view is more about steady returns, where merger arbitrage is essentially a liquidity service – a modest but predictable fee for taking on the risk of seeing a deal through to its completion.

In a Trump 2.0 world, regulatory shifts point toward a more merger-friendly environment, where deal closures may become less risky, even if the spreads narrow. A relaxed regulatory stance could reduce friction in oil and gas M&A, emboldening integrated majors to acquire and scale up assets from smaller E&Ps. This would be a change from recent years, when heightened antitrust scrutiny kept merger arbitrageurs on edge. With an administration likely to lean pro-business, merger arbitrage in the O&G sector could become more of a “low-margin, high-volume” business.

But is there an argument to be made that it could also be an impact play?

Impact Strategy or Stranded Asset Risk?

For sustainable investors, this line of reasoning might seem paradoxical. After all, aren’t integrated majors simply amassing more reserves, effectively increasing their long-term stranded asset risk? That’s the surface-level critique, and it’s not wrong. If global decarbonization accelerates, these reserves currently on balance sheets as assets could shift to liabilities.

But here’s the other side: the capital allocation structure of integrated majors could, in aggregate, allow for a larger absolute dollar amount to flow into low-carbon solutions. If they commit a portion of their capex to these initiatives and maintain or expand these commitments post-acquisition, it could lead to more clean-tech investment industry-wide – even if these companies simultaneously manage more oil and gas assets.

Let’s be clear: M&A alone won’t reduce aggregate emissions. But without these acquisitions, those assets will likely remain with independent E&Ps, whose capital generally goes toward more drilling or capital return to investors, who are often less inclined to invest in climate solutions. By contrast, as part of an integrated oil major, some of those dollars – under pressure from climate-focused shareholders – might flow toward clean energy investments, albeit as part of a mixed portfolio.

Dispersion in Merger Arb as an ESG Opportunity?

Traditionally, merger arbitrage seeks low variance for steady, if narrow, returns. But with the Trump administration’s likely regulatory stance, we could find ourselves in a unique period where a lower-regulation environment could further encourage high deal volume in the oil and gas industry. This could offer the potential for “impact-driven” returns in merger arbitrage, especially as funds selectively position themselves in deals that might accelerate industry-wide shifts in capital allocation – even within fossil fuel-heavy sectors.

Skeptics may argue that a fossil fuel-heavy investment will always carry climate risk, regardless of regulatory shifts. While true, energy transitions are incremental, not immediate. A steady capital flow into low-carbon tech – even within fossil portfolios – could mark a step in the right direction. At the very least, this reframes how sustainable investors might evaluate M&A in O&G, viewing merger arb as a part of climate-conscious capital allocation.

So, Could O&G Merger Arb Be an Impact Strategy?

For sustainable investors willing to look beyond first-glance metrics, there’s an opportunity to at least rationalize merger arb as a strategy that supports an increased allocation to climate solutions. Will merger arb in oil and gas come to be viewed as a core impact strategy? Probably not.

But in a lower-regulation era, where significant capital could be directed into decarbonization tech, sustainable investors have a choice: write off oil and gas M&A as inherently non-impactful, or reconsider merger arb as a potential pathway to capital allocation towards low-carbon initiatives.

So, in the age of Trump 2.0, can oil and gas merger arb transcend its reputation as just a “pennies-in-front-of-the-steamroller” play and find relevance as an impact strategy? It’s one way to look at M&A—and a question worth considering for investors seeking both financial and climate-based returns.