Environmental, social and governance (ESG)-related mergers and acquisitions (M&A) activity is maturing, as corporate leaders across all energy, utilities and resources (EU&R) sectors take a more proactive approach to ESG transition. Until recently, ESG-led M&A, such as the disposal of carbon-intensive assets, was largely considered reactive to regulatory and activist shareholder pressure. Today, companies are managing ESG risks as part of their overall strategy, and view ESG as an opportunity to unlock value. We expect to see continued portfolio optimisation, consolidation, strategic partnerships and capability plays, as businesses reshape asset portfolios and take advantage of opportunities in high growth markets such as energy transition, carbon abatement and decarbonisation.
Outside ESG, we expect robust commodity prices, generous availability of capital and broad concerns over supply chain security to impact M&A activity across the industry. As a result, consolidations are expected to continue throughout the gold sector globally, and in the upstream oil and gas sector in the US. We anticipate that chemical businesses will seek to secure sources of raw materials closer to their production assets through targeted M&A. We also expect infrastructure funds to continue to deploy large amounts of capital into power and utilities, midstream oil and gas assets, and renewables.
“ESG is now the main focus of deal activity in the energy, utilities and resources sectors, and we expect it to remain that way for some time to come.”
M&A activity and values
Energy, utilities and resources deal volumes and values, 2019-2021
Sources: Refinitiv, Dealogic and PwC analysis
Deal volumes and values in the energy, utilities and resources industry increased in 2021 over the prior year by 8% and 67%, respectively. Highlights by geography and sector include:
- The Americas continue to be the dominant region for M&A, although deal volumes in 2021 ended down 1% over 2020, primarily due to an 11% decline in mining and metals deals. Deal values in the region increased by 66% in 2021 over the prior year, with twice as many announced megadeals—those with a deal value greater than US$5bn—notably ones targeting gold mining, upstream oil and gas and specialty chemicals assets.
- Europe, the Middle East and Africa (EMEA) experienced a recovery in deal volumes, growing by 23% over the prior year, mainly due to an increase in transactions in the chemicals (UK and Italy) and power and utilities (UK, Spain and Germany) sub-sectors. Deal values in the region increased by 81% over the prior year, boosted by megadeals of some upstream oil and gas and power distribution assets.
- Asia-Pacific’s deal volumes and deal values grew in 2021 over the prior year by 9% and 56% respectively. The region’s longer-term share of M&A has also grown: the region accounted for 35% of deal volume and 30% of deal value in 2021, an increase compared with the average over the previous five years of 32% and 22%, respectively.
Energy, utilities and resources average deal values, 2019-2021
Sources: Refinitiv, Dealogic and PwC analysis
Mining and metals
A focus on critical minerals
Decarbonisation is leading to an increased demand for critical minerals, particularly in the battery and electric vehicle (EV) sectors. The statistics are compelling; EVs and batteries are the largest consumers of lithium, and with the global EV fleet size projected to increase by 30% per year, they are expected to bypass stainless steel as the largest user of nickel by 2040.
For several commodities, consumption is outpacing production. For example, under the International Energy Agency (IEA) Sustainable Development Scenario, demand for graphite, cobalt and nickel is expected to grow by 20 to 25 times by 2040. Increased demand for these critical minerals will draw interest and investment across the mining and metals value chain (for exploration, development and production assets) and will require government support in mineral-rich jurisdictions, to provide regulatory incentives and expedited approvals to help close the supply gap.
Investment will likely come from traditional miners, as they rethink strategy, diversify and future-proof their portfolio by playing in the critical minerals space, helping some miners reduce their relative exposure to carbon-intensive industries. We also expect interest from sovereign wealth funds, pension funds and, potentially, PE—although PE may be deterred in highly competitive situations.
Traditional consolidation will continue
A number of the largest mining and metals deals in the last year have been traditional consolidations in copper and gold. We expect these types of transactions to continue amid a globally competitive market and as business leaders focus on acquisitions to address security of supply, portfolio optimisation, and cost offsets, to create value.
Strong earnings over the past two years driven by high commodity prices have provided many miners with cash to pursue M&A opportunities. Decreasing price volatility should make it easier for dealmakers to align expectations around deal value and encourage deals, while business leaders will keep a keen eye on headwinds if spikes in demand and production shortfalls, similar to those experienced during the past two years, continue in 2022.
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Oil and gas
Energy transition continues
Oil and gas prices are likely to remain elevated through 2022; however, fewer deals are expected to take place than in 2021, as investors focus on prudent capital spending and stronger returns. In addition, with many PE firms having pledged to reduce or eliminate fossil fuel holdings, the potential buyer pool for these carbon-emitting assets will be limited. M&A activity in pure-play upstream oil and gas assets will most likely come from private sector players that are less beholden to these shareholder concerns, as they continue to expand their asset portfolios and focus on their core competencies.
Capital investment into renewables, cleantech and other places within the energy transition value chain by oil majors, global infrastructure funds, PE and SPACs is pushing up valuations in these sub-sectors. With major oil and gas companies redirecting spending from exploration and drilling to hydrogen and renewables, we expect M&A activity to increase. Hydrogen projects are also expected to attract greenfield investment globally, as countries look to reduce carbon emissions and improve sustainability.
Oilfield services and refineries
The oilfield services (OFS) industry continues to broaden its capabilities as it faces weak demand for new drilling. OFS deal activity in 2022 is largely expected to involve smaller companies buying assets from larger rivals, or combining with other smaller OFS companies to expand into low-carbon adjacencies, such as offshore wind, hydrogen and carbon capture infrastructure.
Refiners may look to convert their assets to import and storage terminals, biofuels refining or repurpose them for energy transition into hydrogen hubs; however, limited M&A is expected due to a diminishing pool of special interest buyers.
Surging natural gas pricing
Energy transition has increased demand pressure on natural gas, now filling a role as a transition fuel on the path to reduced hydrocarbon reliance. Liquified natural gas (LNG) production is nearing capacity in most key exporting countries, which, combined with a number of other supply/demand influences, has led to significant increases in natural gas pricing around the globe. As a result, we anticipate those industries with high levels of energy consumption (e.g., manufacturing and retail power and utilities) may see a slowing in production, particularly in Europe, resulting in certain deals being delayed in early 2022.
A pervasive and widening supply gap, exacerbated by higher demand from both LNG exporting and importing countries, can be expected to support further investment in midstream LNG liquefaction and transportation capacity, and potentially drive deal activity for existing LNG assets.
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Power and utilities
A hot deals environment
Global deal activity in power and utilities quickly rebounded to pre-pandemic levels, and industry participants continue to reposition their businesses and rationalise portfolios. As we progress further into 2022, we expect an increasingly contestable marketplace (pension funds, specialised infrastructure funds, public utilities and independent power producers), as energy transition policies, technological innovation, and ESG drive investment strategies and deal activity in the sector.
In particular, the acceleration of ESG deals activity reflects a growing trend in novel partnerships with local stakeholders, including with indigenous communities. We also have noted a proactive shift in the way companies are engaging with investors, regulators, policy-makers and clients on ESG initiatives.
Pressure to find value
Dealmakers must now balance ESG targets and growth opportunities against their need for business model clarity and reliable returns. As a result, we expect significant capital investment and M&A in traditional renewable technology, along with transmission infrastructure, carbon capture, battery storage, hydrogen and other clean technologies. Sustainable energy targets create attractive opportunities in renewable energy build-out because they are often supported with contracted revenues, which, in turn, increase competition for these assets.
As ESG policies are clarified and corporate strategies are strengthened, broad investor interest should continue to grow, and industry players will need to determine their strengths and areas of focus to compete.
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Chemicals
M&A activity accelerated in the second half of 2021 and is poised to continue in 2022, as the chemical sector recovers from severe demand and supply chain disruption during the pandemic. Potential headwinds may impact margins, from inflationary pressures, as raw material prices and labour costs rise and uncertainties from trade tensions and COVID linger.
Sustainability and decarbonisation
Societal expectations, regulation and net-zero commitments increase the urgency for chemical companies to reduce their carbon footprint. We expect strategic decision-making in 2022 to focus on divestment of carbon-intensive assets, development of sustainable processes and integration of sustainable materials into supply chains. Collaboration with other industry participants may also increase, such as recent investments in renewable energy and waste-to-energy solutions.
Increasing resilience and security
Cross-border chemicals deal activities are expected to increase significantly, as companies near-shore supply and stabilise their supply chains. Chemical companies have been challenged by global supply chain disruptions due to pandemic-related capacity shutdowns, feedstock shortages, elevated shipping costs and port congestion. These challenges forced regional players to look abroad to establish a more agile and resilient supply chain.
Capital availability and competition
Several larger assets have come to market in recent months, following strong demand for specialty ingredients, rising multiples, and rebounding demand in end-markets such as automotive and construction. PE is well placed with abundant capital to make acquisitions or realise (early) exits on portfolio assets to take advantage of current valuations. At the same time, many corporations have emerged from the pandemic with stronger balance sheets, adding to the available capital for deal-making and creating an expectation of greater competition and higher premiums for certain assets.
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M&A outlook for energy, utilities and resources
Global energy, utilities and resources companies and their investors are putting environmental, social and governance at the heart of their strategic agendas. We expect business leaders to move quickly to rebalance their portfolios and to pursue value creation opportunities in ESG growth areas such as renewables, carbon capture, battery storage, hydrogen, transmission infrastructure and other clean technologies. Robust commodity prices, a plentiful supply of capital together with lingering concerns over the security of raw material supply will result in EU&R dealmakers continuing to engage in more traditional forms of M&A, such as consolidations, capability-driven acquisitions and divestitures of non-core assets.
About the data
We have based our commentary on M&A trends on data provided by industry-recognised sources. Specifically, values and volumes referenced in this publication are based on officially announced transactions, excluding rumoured and withdrawn transactions, as provided by Refinitiv as of 31 December 2021 and as accessed on 2 January 2022. This has been supplemented by additional information from Dealogic and our independent research, and includes data derived from data provided under license by Dealogic. Dealogic retains and reserves all rights in such licensed data. Certain adjustments have been made to the source information to align with PwC’s industry mapping. Average deal value is calculated based on announced deals with a disclosed deal value only.
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National Deals Energy, Utilities, Mining and Industrials Leader, Partner, PwC Canada
