Ongoing geopolitical uncertainty, high commodity prices, record break-even margins and the continuing shift to decarbonization create an unprecedented environment for oil and gas companies as well as new opportunities. In the coming year, companies are likely to focus on monetizing non-core assets to expand portfolios in new directions, including carbon capture technology, renewables, liquefied natural gas, hydrogen and biofuels. Government incentives like the Inflation Reduction Act could help to make cleaner energy investments more economical while allowing companies to achieve faster returns.
The market for valuable assets continues to be strong as we have seen some quality deals close this past year. Rather than the historical use of debt to finance transactions, energy companies are likely to invest free cash flow back into strategic deals with a focus on longer-term returns. Dealmakers may also look to leverage higher equity resulting from current commodity prices as currency for transactions. As a result, we anticipate that deal activity will continue to gain strength in 2023.
Geopolitical pressures — including the Russia-Ukraine war and production decisions by OPEC — continue to drive commodity prices. In addition, new COVID lockdowns in China have led to a sharp decline in demand that is undercutting crude prices.
While economic and geopolitical uncertainty continues to be a factor, year over year energy deal activity remained steady. Our look back at the last twelve-month (LTM) period ending on November 15, 2022 showed 140 deals valued at $112 billion. This is up from 119 deals valued at $103 billion during that same period the previous year.
As we move into 2023, Europe’s search for alternative energy supplies that aren’t dependent on Russia could benefit US producers. Many European and Asian countries, seeing the level of investment in US LNG facilities, are looking to America as a source of future natural gas supplies.
This is likely to be a key driver of demand for natural gas exports for decades to come — and it could encourage investment and deals around the natural gas space. At the same time, growing pressure to reduce carbon emissions is driving divestiture of traditional oil assets in favor of natural gas.
Energy investors are wary of companies expanding or chasing growth. Management should use their portfolio review process to allocate assets and drive the return on capital. Investors are looking for signs of fiscal discipline amid higher commodity prices.
Energy companies that make timely and objective divestiture decisions are at an advantage in creating value and generating shareholder returns.
According to an upcoming PwC study, most energy and utilities companies that develop a reinvestment plan for divestitures report returns of five percent or more. In our interviews, however, industry executives said a lack of in-house expertise can lead to execution delays. Having a qualified advisor can reduce these delays and maximize divestiture value.
“Current commodity price environment, record break-even margins and equity values give companies the ability to make deals without taking on debt as well as invest in renewables, carbon capture, bio fuels, hydrogen and other expanding focus areas.”