By Nicole Jao

NEW YORK (Reuters) – Activity in the oil and gas industry rose 57 percent last year as energy companies increased spending on development, fueled by higher cash flows from previous years’ profits, a report showed on Tuesday.

According to a report by Ernst & Young, the largest energy companies spent $49.2 billion on mergers and acquisitions in 2023, up from $31.4 billion in 2022. The increase is mainly due to mega-deals between integrated oil and gas companies.

According to EY, M&A activity is expected to continue this year and into 2025, driven by further mega-deals.

Spending on oil and gas production also increased last year: spending on exploration and development increased by 28 percent to 93.1 billion dollars.

The surge in deal-making spending and the expansion of reserves marks a shift in strategy after years of focusing on shareholder returns rather than growth, which many companies had used to try to lure back investors who had fled the sector.

Last year, oil and gas companies halved their spending on dividends and share buybacks from a record $57.7 billion in 2022 to $28.9 billion.

Industry-wide consolidation boosted M&A activity and increased total corporate spending to $142.3 billion, up 36% from 2022.

“We have started to see a focus on consolidating operators’ positions in 2023,” said Bruce On, a partner in EY’s strategy and energy transactions group, in an interview, noting a shift in strategy toward investing in the core business.

He said that companies with a lot of cash are focusing on increasing their efficiency through economies of scale and making the most of existing operations.

Their profits fell 55% to $83.9 billion in 2023, mainly due to lower spot prices for West Texas Intermediate (WTI), the report said.

Chevron (NYSE:) was the largest real estate buyer in 2023 with total real estate acquisition costs of $10.6 billion, primarily due to the $6.3 billion deal to purchase the Denver-based oil exploration and production company PDC Energy (NASDAQ:), the report said.

ExxonMobil (NYSE:) completed the $60 billion acquisition of Pioneer of natural resources (NYSE:) in May of this year. In October, Chevron announced an agreement to buy oil producer Hess (NYSE:) for $53 billion. However, the deal has been delayed until at least mid-2025 due to a legal dispute.