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Global M&A Trends in Energy, Utilities and Resources: 2021 Mid-year Update

Global decarbonisation coupled with plentiful capital and an economy emerging from the pandemic will continue to drive strong M&A activity through the rest of 2021.

M&A deal activity amongst energy, utilities and resources (EU&R) companies continued to trend upwards through the first half of 2021, although variation amongst sectors and territories persisted. Despite stabilising supply and demand as economies recover, companies remain focused on capital discipline and shareholder value. This could slow deal-making at many companies as they look for deals that are likely to earn accretive returns faster than other capital investment alternatives.

Macroeconomics are also a factor. Global stock markets continue to be buoyed by rising economic activity and improved investor confidence. This leads us to expect that M&A deal activity will remain strong for the rest of the year—with the caveat that ongoing global trade tensions and uncertainty surrounding the outcome of upcoming elections in certain energy and resource–producing territories may dampen some investors’ enthusiasm.

Capital is a key enabler of deals, and the capital landscape in energy, utilities and resources continues to evolve rapidly, largely due to ongoing environmental, social and governance (ESG) activism by investors, governments and courts. What is now a global transformation to net zero will continue to influence M&A activity and capital project investment decisions within EU&R companies.   

“Previously centred in Europe, the drive for energy, utilities and resources companies to decarbonise and achieve a net zero business platform is now a truly global event that is presenting tremendous opportunities to create long-term, sustainable value.”

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

Key themes driving M&A activity

We anticipate several key themes will shape the M&A deal landscape in energy, utilities and resources in the second half of 2021 and into 2022.

Capital availability

In general, there is no shortage of capital in play for deal-making, with interest rates likely to hold at record lows for the rest of 2021. Significant SPAC activity during the period has been focused on energy transition, particularly in the US, and has contributed to intense competition for such deals.

Carbon-intensive projects and companies with large ESG risks, on the other hand, are finding it increasingly difficult to obtain finance—as well as insurance. Those seeking to divest carbon-, water-, and land-intensive assets to meet their ESG objectives are finding that the buyer pools and capital sources supporting those assets are already in decline. Investment in high-emitting but economically viable assets will most likely need to come from private sector players that are less sensitive to social licence and have lighter public reporting requirements or strategically motivated sovereign wealth.

In this environment, companies are clearly pursuing four investment strategies to attract different pools of investors:

  • Legacy optimisation: Attractive to 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: Fertile ground for 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: Preferred assets for private equity and venture capital growth investors aiming for higher risk net zero assets such as electric vehicle (EV) charging networks, battery storage and hydrogen.
  • Net zero pivot: Major oil and chemicals companies, large mining companies and integrated utilities focusing M&A investment on strategic net zero assets, such as renewables, EV charging networks, and energy management technology. 

Post COVID-19 recovery

Global energy, utilities and resources markets have continued to recover during the first half of the year, with implications for deal-making in the sector. As vaccines roll out, key economies are opening up, increasing demand for energy and resources. And as government curtails the stimulus programmes that have been supporting the energy and resource sectors globally, we expect an increase in global restructuring activity, particularly for more junior firms.

 

Energy, Utilities & Resources industry-related stock price indices

Line chart showing the change in EU&R-related stock price sector indices from January 2020 to June 2021. Compared with pre-pandemic levels, after the initial instability, the Utilities index has largely stabilised slightly below; the Metals & Mining and Chemicals indices have both climbed strongly beyond; the FTSE 350 Oil & Gas Index has dropped well below, although the downward trend halted and recovered some ground at year-end to maintain some stability.

Source: S&P Capital IQ
Data period: 2 Jan 2020 to 11 Jun 2021
  • Oil prices have continued to improve through the first six months of the year. Despite this, most energy and production (E&P) firms remain cautious with their capital plans for the rest of 2021 and 2022. This suggests continued reduced activity and potentially lower valuations for energy services firms, particularly those weighted towards servicing E&P firms. We expect consolidation in the energy services sector as firms look to expand their service offerings and realise synergies.
  • Industrial and precious metals continued their bull market into 2021—with many metals prices currently at ten-year highs. We expect metals pricing to remain strong and drive further M&A activity through 2021 and 2022.
  • Chemicals companies, whose products are closely linked to GDP and consumption, continued to recover. Plastic resin pricing has increased due to a global tightness of supply. As economies continue to recover, we expect chemicals and plastics pricing to remain strong. Significant new supply coming online in 2022 should ease the supply gap, thus normalising pricing and bringing buyer and seller value expectations closer together and enabling more deals to close.  

Geopolitical trends

Political and regulatory changes are also affecting how the sector’s businesses think about M&A strategy. Geopolitical responses to COVID-19 recovery, ongoing trade tensions, and changes in government can be triggers for higher inflation, slower growth, regulatory change, social unrest, increased royalties, and increased corporate or resource taxes. These factors also influence bond yields, interest rates, corporate valuations and asset liquidity. All these factors and the general uncertainty as to their outcome may discourage, or at least delay, investment and M&A activity in the impacted regions.

Among the shifts underway: geopolitical uncertainty exists in many countries. The US is contemplating new corporate tax legislation. Mexico, Peru, Chile and Argentina, four major energy- and resource-producing nations in Central and Latin America either held or are holding presidential and/or legislative elections in 2021. Other major energy- and resource-producing countries with elections in 2021 include Germany, Iraq and Iran.  

voting box and election

Ongoing global trade tensions continue to be a disruption to economic activity. A few Asian countries are also in discussions to form new trade agreements, and significant uncertainties exist with respect to the outlook for trade between several of the world’s largest economies.

ESG

The pandemic has changed the behaviours and priorities of customers and employees; and a sharper focus on social justice, equality, climate change and other societal issues, including diversity and inclusion, has elevated the importance of ESG. In today’s market, investors and stakeholders are more frequently calling for, and pointing to, ESG as a key investment priority, viewing social good and profitability as increasingly intertwined. 

The global transition to net zero and greener energy sources continues to accelerate. Over the past few years, Europe led the way in decarbonisation, with Asia increasing its activity in the last year or so. On his first day in office in January 2021, President Biden signed the instrument to bring the US back into the Paris Agreement, and by doing so signaled the US’s commitment to climate change action. This not only aligned the US with the direction of most of its global peers with respect to decarbonisation, but has given new momentum to decarbonisation initiatives in North America. In our view, the efforts of energy, utilities and resources companies to decarbonise is now global. We expect this global footprint will drive a higher volume of net zero related deals over the near to medium term.

Mergers and acquisitions will remain 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. That said, long-term demand for battery minerals and hydrogen continues to strengthen. We expect this to lead to higher volumes of feasibility and commercialisation projects in new green technologies, which will create demand for capital and thus opportunities for investment. As those projects mature, merger and acquisition  opportunities will begin to emerge.

The divestment of carbon-intensive assets, such as oil fields or thermal coal mines, has been one decarbonisation path used by major energy and resources companies in recent years. Questions are now emerging as to the effectiveness of that activity in reducing global carbon emissions, as in many cases the divested assets are now producing more oil or coal than they were prior to sale. It is possible that this line of thinking could lead to companies being asked to hold and wind down such assets rather than sell them.

M&A outlook for energy, utilities and resources 

Energy, utilities and resources companies still face a critical strategic decision-making inflection point. The transition to carbon neutrality is now a truly global event, and companies need to decide when and how to play. The choice is to continue operating and pursuing legacy assets and industries in as cost-efficient a way as possible, or to embrace a new path towards decarbonisation via integrated service offerings or complete business model shifts. Both options carry risk and reward. 

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 2021 and as accessed on 5 July 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

Seenu Akunuri

Seenu Akunuri

US Energy, Utilities and Resources 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

Michelle Grant

Michelle Grant

Canada Energy, Utilities, Mining and Industrials Deals Leader, PwC Canada

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