Global M&A Industry Trends in Energy, Utilities & Resources
M&A activity remains an effective way to decarbonise, decentralise and digitise
Despite valuation challenges posed by volatile commodity prices, an uncertain demand outlook and global travel bans impeding deal execution, we believe interest still exists in doing mergers and acquisitions (M&A) in the Energy, Utilities & Resources (EU&R)[1] industry – at the right time.
The carbon neutrality agenda continues to transform the industry and drive deal activity and capital availability. We think it will ultimately be accelerated by COVID-19.
While digital technologies remain a primary industry disruptor, supply-chain deglobalisation, resilience and de-risking are gaining prominence thanks to current supply-chain disruption and ongoing trade disputes.
These factors, combined with the complexity resulting from an asymmetric recovery from COVID-19 and its associated economic downturn across companies, industries and geographies, will determine M&A trends with regard to volume, type, size and pace of deal activity in the EU&R industry in the short to medium term.
[1] Energy, Utilities & Resources sectors include Oil & Gas, Power & Utilities, Mining & Metals and Chemicals.
“In the near term we expect relatively low deal volumes and few megadeals. Deals that do get done will likely be opportunistic but well-disciplined from a capital and strategy perspective.”
M&A trends in the first half of 2020
Deal volumes across EU&R have trended down since peaking at more than 5,500 in 2017 amid a slowing economy, geopolitical strains and trade tensions. In the first six months of 2020 they have tended to decline across all sub-sectors – in particular, Oil & Gas (O&G) and Power & Utilities (P&U).
Global Energy, Utilities & Resources Deal Volumes and Values
Deal values have also trended downwards, except in 2018 when they were bolstered by a record number of megadeals (almost half of which were in P&U) delivering an overall average deal value of US$288 million – significantly above the average for the first half of 2020 at US$95 million.
Global Energy, Utilities & Resources Average Deal Values
In the past six months, a number of announced deals were either amended or cancelled and many planned M&A transactions have been deferred. Deals that did complete were largely underway prior to COVID-19. Only four new megadeals were announced in the first half of 2020, compared to eight in the same period in 2019.
M&A hotspots
We see the following areas as potential M&A hotspots in the next 6-12 months, although few megadeals are expected in the short term:
- Opportunistic acquisitions across all sectors by companies with strong balance sheets (particularly Mining & Metals) to capitalise on COVID-19-related distress and immediate liquidity needs. Distressed oilfield services or chemicals companies could feature here.
- O&G majors reviewing their portfolios and liquidating assets to suit long-term strategies. For example, BP recently announced the divestiture of its petrochemicals business and other examples may include some of Shell’s interest in QCLNG in Australia, Eni’s Australian natural gas assets and certain of ExxonMobil’s upstream assets in the US Gulf of Mexico and UK North Sea.
- Renewed interest in energy infrastructure as a flight to safety in uncertain times, given its regulated nature.
- Offshore wind power in Japan (where an auction process is underway). Also renewables and other environmental, social and governance (ESG) plays more broadly.
- Digital technologies and advanced robotics to support remote working and automation, driven by COVID-19 learnings, as well as “smart city” investments.
- Technology providers that help utilities to automate operations and trading and reduce risk etc. will continue to draw M&A interest. This is partly because many private equity (PE) investors have moved from looking at O&G to P&U because such companies are more tech focused. Also, this is a natural PE ownership space: too small for large tech companies, but too advanced for small companies to own individually.
- Otherwise, PE is not expected to engage in significant M&A activity in the short term due to the current focus on existing portfolio companies and uncertainty as to how the economic recovery from COVID-19 will play out. This could change in the first half of 2021 if there is enough clarity by then.
Key themes driving M&A activity
The impact of decarbonisation
Stakeholder activism on environmental and social licence matters will continue to adversely impact capital availability for carbon, water and land-intensive activities.
Carbon neutrality and energy transition profoundly changing the energy sector and the demand outlook for the fossil fuels (oil, gas and coal) that currently supply it.
Recent government incentives and targets (the European Green Deal, the Paris Climate Agreement) and shareholder pressure have driven major players to make big sustainability commitments to reduce emissions or set a target date to reach “net zero”. Ways to meet these commitments include acquisitions of green technologies, expertise and capabilities, moving closer to the end user and decarbonising energy supply.
Sustained convergence has occurred across the energy value chain in Europe, driven by climate-change objectives, with companies moving away from pure oil and gas plays to electricity and the production, distribution and trading of new fuels. This trend is starting to spread to Asia.
The shift to renewable or low-carbon energy (“new energy”) has been gaining momentum and overall we expect it to accelerate, thanks to COVID-19 stimulus packages focused on green technologies in some parts of the world (including the UK and Europe). This is despite low oil prices, which make greener transport options (such as electric vehicles) less competitive, and some new energy projects being put on ice as companies (and territories) focus on the economic fallout of COVID-19.
Explore the other key themes driving M&A activity.
Where value creation opportunities lie
Value creation and value preservation opportunities are likely to surface as a result of lessons learned during COVID-19. Such value creation opportunities could come to life in a variety of ways as companies look to repair, rethink and reconfigure their business models, including traditional M&A, asset swaps, asset spinoffs, joint venture asset pooling and strategic alliances or partnering.
Many companies (and territories) will rethink how greater security of supply can be achieved in the wake of the supply-chain disruption caused by COVID-19 and cost uncertainty resulting from ongoing global trade conflicts. The trade-off between risk/resilience and cost will be tested. As companies reconfigure their business models to address these issues and unlock value, this could manifest itself through:
- Diversification of the supplier base via the spread of suppliers across geographies or more local sourcing to reduce import dependence.
- Relocation of manufacturing facilities either closer to the customer or the raw material source.
- Investment in technology for real-time supply-chain visibility and demand planning.
- Bringing the sourcing of raw materials or services in-house to further de-risk supply chains.
Digitalisation of Energy, Utilities & Resources companies is still in its early stages, although COVID-19 has accelerated the use of technology to support supply-chain efficiency and new ways of working. The acquisition of tech providers is shifting from an operational efficiency gain play to a pathway towards automation and the like; favoured now more than ever for logistical and remote workplace reasons.
Historically, plays driven by ESG activism have often been seen as “tick-box” endeavours to satisfy stakeholders; they are now increasingly being viewed as opportunities to create financial benefit.
Explore the other key themes driving M&A activity.
Asymmetric recovery and dealmaking
Demand destruction resulting from COVID-19 itself and the subsequent recession, coupled with uncertainty over the pace and shape of economic recovery, will create high levels of distress, particularly as government stimulus packages wind down. This distress will drive opportunistic dealmaking from those with solid balance sheets and cash flows, targeted at companies with liquidity challenges but strong underlying business models.
The global recovery from COVID-19 will be asymmetric, with some territories recovering much faster than others, largely correlated with levels and duration of government support. These divergences will create cross-border opportunities. Against this, COVID-19-related travel restrictions may deter companies from pursuing capital asset-intensive transactions abroad and see them switch to looking locally first.
The crash in oil demand, much of which may be irreversible due to permanent structural changes in travel and mobility patterns, coupled with the OPEC+ supply war and resulting price shock, has had a significant impact across the O&G sector’s value chain, with a number of recently announced deals cancelled or amended and planned deals delayed. A highly volatile, low-price environment is expected to continue for some time, which could prove a challenge from a valuation perspective.
Explore the other key themes driving M&A activity.
Global M&A Industry Trends in Energy, Utilities & Resources
- Upstream (exploration and production): industry trends indicate Oil & Gas majors will continue reviewing their portfolios and liquidating assets (particularly mature producing assets) to suit long-term strategies, though the oil price shock may result in significant value gaps. These reviews may also lead to downstream acquisitions to lock in demand in sub-sectors such as fuel retail and lubricants.
- Midstream (pipelines and LNG facilities): major pipeline and urban gas asset consolidation will continue in China.
- Downstream (refining and distribution/retailing): value opportunities in M&A arise from digitalisation: process automation, predictive maintenance, crude scheduling and process optimisation to improve efficiency and reduce costs for refiners; dynamic pricing tools to assist in active management of both supply and sales pricing in real time for retailers.
- Oilfield services: portfolio simplification (shrinking to the core business, simplifying the operating model) will be the primary focus of oilfield services player and as a result sub-scale assets are likely to come to market. Players will compete to "core-up" in the markets they deem attractive.
- Generation: decarbonisation will continue to drive investment in renewables, energy efficiency and AI for utilities and water management. Solar and wind will remain hot in China and a government auction process is underway for offshore wind power in Japan.
- Infrastructure and networks: while short-term business and operational challenges exist, the regulated nature of these assets creates greater certainty around revenues and cash flows, making investment in energy infrastructure more attractive than ever. We expect continued acquisition and development of electric-vehicle battery and charging infrastructure in China, Asia, more broadly and in Europe.
- Retail: in the wake of COVID-19, industry trends demonstrate demand has fallen in the B2B market. This could generate a number of crisis situations, though government support for retailers may offset some of the impact. Shifts in service offerings, business models and customer/regulator relationships will drive cross-sector or technology-led transactions, particularly in the areas of AI and Big Data.
- Bulks: mining majors have excellent balance sheets to weather the downturn. They will be eager to make acquisitions when the time is right. Considerable recent interest in coking coal assets is expected to continue to drive M&A activity.
- Precious metals: commodity prices are largely holding up, in particular gold, which is viewed by investors as a safe haven and is trading at its highest since 2003. While deals are not expected to recur at the same size and quantum as in recent years, opportunities exist and will be seized.
- Base metals: the ongoing need for resources growth could drive larger miners to buy into junior explorers in need of cash.
- New energy minerals: decarbonisation and social-licence matters plaguing the thermal coal industry will drive divestitures and minerals used to produce new forms of energy (lithium, cobalt) will be favoured.
- Petrochemicals: consolidation and investment in orphan assets is expected in order to scale up, respond to geographically shifting demand and ensure access to feedstocks.
- Intermediate chemical: companies will deploy targeted M&A strategy in two ways:
- To deliver customised solutions and innovation, adapting commercial models to customer needs.
- To shift the production mix towards more high-tech, high-value products.
- Speciality chemicals: we believe companies will invest in new offerings and expand into adjacent areas to build comprehensive product offerings for target markets.
- Downstream customer industries: companies will seek to acquire digital capabilities to build customer ecosystems and shift to new revenue models based on insights into customer needs and challenges.
Energy, Utilities & Resources M&A Outlook
We recognise the challenges in doing deals in this environment. To help mitigate these challenges, buyers and sellers can:
- Adopt a structured value creation methodology to identify and articulate the drivers of value created or lost through the repair, rethink and reconfigure phases of COVID-19 and an asset’s path to recovery.
- Implement creative, innovative and flexible deal structures to mitigate value-uncertainty risks, by way of value ratchets up/down based on cash-flow forecasts, and contingent mechanisms linked to commodity prices or production volumes, etc.
- Initiate new ways to conduct due diligence while travel restrictions remain in place. For example, using drones for physical asset inspections and increased sharing of transaction-level data by vendors to enable remote detailed due diligence using agile and comprehensive data analytics tools.
Read the cross-industry Global M&A Industry Trends
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 30 June 2020, and supplemented by additional information from Dealogic and our independent research. This document 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. We define megadeals as transactions with a deal value greater than US$5 billion. Average deal value is calculated based on announced deals with a disclosed deal value only.
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