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.”
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).
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.
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.
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:
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.
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:
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.
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.
We recognise the challenges in doing deals in this environment. To help mitigate these challenges, buyers and sellers can:
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.