Global M&A Industry Trends in Energy, Utilities & Resources

Investor confidence will fuel M&A activity in 2021 as companies with capital decarbonise, consolidate and optimise their business platforms

M&A deal activity in energy, utilities and resources (EU&R) showed signs of recovery through the second half of 2020, although the deals landscape remains patchy, with considerable variation among sectors and territories. Ongoing waves of COVID-19, asymmetrical rates of economic performance and volatile commodity prices are all playing a part. Companies with capital are finding opportunities to invest, but others continue to be stressed by unpredictable conditions.

We expect the transformation to net zero to influence a number of M&A deals, much as it did during 2020. Traditional value levers (portfolio optimisation and consolidation) and the oil price shock from the first half of 2020 will also continue to play a role. Contrary to our mid-2020 expectations, supply chain securitisation played a minor role in M&A activity in the second half of the year. We still expect this to contribute to deal activity in the industry, but we don’t see clear M&A trends yet.

We still see macroeconomics as a major contributor to deal activity. Towards the end of 2020 the global stock markets were buoyed by progress on COVID-19 vaccines and factors such as increased government stimulus measures and the outcome of the US presidential election. As economic activity continues to pick up, we expect to see further improvement in M&A deal activity in 2021.

Capital is a key enabler of deals, and the capital landscape in energy, utilities and resources is changing, largely due to decarbonisation. We are seeing an accelerating trend of commitments to net zero beyond Europe. Major global corporations (including PwC) are increasingly announcing carbon-neutral targets as part of their environmental, social and governance (ESG) programmes. Private equity, pension and sovereign wealth funds, as well as banks and insurers, continue to announce climate priorities. These initiatives will lead investor classes to reallocate capital between asset groups. Ultimately, they will dictate which mergers and acquisitions get done and by whom.

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“As the transformation to net zero advances, energy, utility and resources companies are pivoting towards more integrated value chains focused on delivering solutions to customers with minimal environmental impact.”

Wim BlomGlobal Energy, Utilities & Resources Deals Leader, Partner, PwC Australia

M&A hotspots

In 2021, we anticipate the following M&A hotspots in the energy, utilities and resources space:

  • Mining and Metals: Significant interest in gold is likely to continue if gold prices remain high, leading to midsized consolidations. We anticipate companies to increase their investment in new energy mineral groups and in metals used in batteries.
  • Chemicals: We anticipate plays in specialty chemicals as corporates and private equity continue to pursue growth and margin expansion in an environment with low organic growth. Commodity chemicals are likely to engage in divestitures and restructuring as they realign and reconfigure their portfolios for long-term value creation. As more chemical companies announce net zero targets, they will seek to decarbonise asset portfolios. However, a lack of capital from legacy assets or other sources may hamper their ability to execute on their investment strategies.
  • Power and Utilities: We expect more mergers and acquisitions in renewable energy. Companies are likely to rethink their portfolios in light of announced ESG efforts and commitments to net zero targets—and as governments continue to offer incentives and directives, such as Japan’s wind farm auction process. We also expect retail consolidations in response to reduced demand caused by the pandemic and the resulting margin squeeze.
  • Oil and Gas: M&A deal activity is likely to increase in 2021 as long as oil prices remain stable. Upstream consolidation—such as the Chevron/Noble and Husky/Cenovus deals announced during the second half of 2020—will continue to create economies of scale, especially in North America. We also anticipate more distressed or restructuring plays than in other sectors, particularly among offshore drillers and refineries facing closure or terminal conversions.

Key themes driving M&A activity

We expect several key themes to shape the M&A deal landscape in energy, utilities and resources in 2021:

Capital availability

In general, debt has never been cheaper, and the current economic recession is likely to keep interest rates low well into 2021. Moreover, a growing number of banks and private equity funds are signatories to the Collective Commitment to Climate Action (CCCA), agreeing to favour investment in new energy and renewables and exit carbon-intensive assets. Similarly, the United Nations-convened Net-Zero Asset Owner Alliance, a group of institutional investors representing $5.1 trillion of assets under management,continues to gain traction.

While companies seek to divest carbon-, water- and land-intensive assets to meet their ESG objectives, the buyer pool and capital sources supporting those assets are likely to decline in the coming years. Investment in high-emitting but economically viable assets may come from private sector players that are less sensitive to social licence and have lighter public reporting requirements.

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In this environment, we anticipate four investment strategies to attract different pools of investors:
 
  • Legacy optimisation: Lean-focused private equity or high-net-worth investors, strategic sovereign funds, or corporates targeting assets in structural decline, such as upstream oil and gas, thermal coal and nuclear generation.
  • Net zero rent: Infrastructure, private equity, sovereign wealth and pension funds and renewable-energy generators seeking lower-risk net zero assets such as grid scale renewables and net zero asset financing. 
  • Net zero growth: Private equity and venture capital growth investors aiming for higher-risk net zero assets such as electric vehicle charging networks, battery storage and hydrogen.
  • Net zero pivot: Major oil and chemical companies, large mining companies and integrated utilities focused on strategic net zero assets such as renewables, electric vehicle charging networks and energy management technology.

It’s not yet clear how much investor support traditional oil and gas giants will find for their efforts to break away from their legacy role and decarbonise. They will need to find ways to attract investors who could otherwise direct their funds to companies already operating in the renewables space.

Macroeconomic factors and asymmetric recovery

Just as the COVID-19 pandemic affected geographies and industry sectors differently, so will the recovery—with an equally asymmetric effect on M&A activity in 2021. Positive news about vaccines, improving local economies, increased government stimulus measures and the outcome of the US presidential election, among other factors, have already led to a global bump in stock market valuations. We expect this to translate into increased levels of deal activity in 2021. 



Energy, Utilities & Resources industry-related stock price indices

Line chart showing the change in EU&R-related stock price sector indices during 2020. While most sub-sector indices have largely recovered to pre-pandemic levels, the FTSE 350 Oil & Gas Index ended the year significantly below where it started.

Source: S&P Capital IQ
  • The oil price shock that occurred in March 2020 continues to affect the oil and gas value chain; downstream assets have felt the brunt of the initial impact, with many running at negative margins and being sold or flagged for divestment or closure as a result. We expect exploration and production assets to be next (extending activity which has already begun in the North Sea), followed by oilfield services. The price of oil was highly volatile in the first half of 2020. It has been more stable in recent months, but the long-term outlook remains uncertain.
  • Other commodities, including gold, copper, uranium and palladium, have seen prices rise since 2019. Uranium prices are forecast to continue to rise over the next five years, which is likely to trigger M&A deal activity in that commodity. Gold prices are likely to decline from 2020 highs, but remain at much higher levels than in prior years. As a result, we expect to see a high level of M&A processes in the gold sector in 2021.
  • Chemical companies, whose products are closely linked to GDP and consumption, are still suffering from the general economic downturn. As the economy recovers, we expect more diverse chemical companies to gain the confidence to undertake larger transactions.
  • The US saw more corporate bankruptcies in 2020 than in any other year since 2010. Energy was the third most restructured sector, following consumer discretionary and industrials.2  Restructuring activities have been mixed across other territories. A number of distressed asset sales have already begun reshaping the global downstream oil and gas market. Several US and smaller Australian coal businesses exposed to low coal prices have also been restructured. While government support has underwritten the stability of a number of EU&R businesses through the short term, we anticipate an increase in restructuring activity as support programs end, unless economic recovery is swift and robust.

Decarbonisation

COVID-19 has accelerated the global transition to carbon-neutral and greener energy sources. In recent months, an increasing number of oil companies across regions have announced commitments to reduce carbon emissions, including ConocoPhillips and PetroChina. These are significant and will likely encourage others to follow suit. We’ve also seen commitments by companies such as BASF and Bayer in the chemicals and agrichemicals sectors, and Baker Hughes and Petrofac in the oilfield services sector.  

decarbonisation

Countries are continuing to make moves as well. In September 2020 Chinese President Xi Jinping pledged that China will achieve carbon neutrality by 2060, and in October 2020 Japanese Prime Minister Yoshihide Suga announced that Japan is aiming for zero emissions by 2050. The UK is looking to exit the last of its coal-fired stations ahead of schedule (2024 instead of 2025), due to the reduction in demand triggered by COVID-19.

Mergers and acquisitions will be key to the sector’s transformation to net zero, along with partnerships and investments in technologies. While some of the necessary technologies already exist, the business models to use them profitably require further development. Even assets that are already economical aren’t yet available at the scale required to have significant impact and create value.

Energy, Utilities & Resources M&A outlook

EU&R companies are at a critical juncture. Facing an inevitable global transition to carbon neutrality, they need to decide when and how to play. The choice is either to continue operating and pursuing legacy assets and industries in as cost-efficient a way as possible, or to embrace a new path toward decarbonisation via integrated service offerings or complete business model shifts. Both options carry risk.

outlook

Footnotes:
[1] “United Nations-convened Net-Zero Asset Owner Alliance,” UNEP Finance Initiative, accessed 13 January 2021, https://www.unepfi.org/net-zero-alliance/.
[2] Tayyeba Irum, Chris Hudgins, ‘US bankruptcies surpass 600 in 2020 as coronavirus-era filings keep climbing’, S&P Global Market Intelligence, 15 December 2020, accessed 13 January 2021, https://www.spglobal.com/marketintelligence/en/news-insights/latest-news-headlines/us-bankruptcies-surpass-600-in-2020-as-coronavirus-era-filings-keep-climbing-61734090

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 2020  and as accessed on 3 January 2021. This has been 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.

Contact us

Wim Blom

Wim Blom

Global Energy, Utilities & Resources Deals Leader, PwC Australia

Mile Milisavljevic

Mile Milisavljevic

US Energy Deals Leader, PwC United States

Drew Stevenson

Drew Stevenson

UK Energy, Utilities & Resources Deals Leader, PwC United Kingdom

Steffen Apfel

Steffen Apfel

Germany Energy, Utilities & Resources Deals Leader, PwC Germany

Franklin  ­ Zhai

Franklin ­ Zhai

China Energy Deals Leader, PwC China

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