Deal trends in energy, utilities and natural resources

May 2024  |  COVER STORY | MERGERS AND ACQUISITIONS

Financier Worldwide Magazine

May 2024 Issue

The energy, utilities and natural resources space is attracting considerable attention, with stakeholders cognisant of the challenges of energy supply security and the green transition. Efforts are ongoing to build more sustainable, secure energy systems on a global scale.

Concepts including decentralisation, decarbonisation and digitalisation have been driving forces of transformation across the industry. This is driving changes in approach, as shown by innovations in renewables, battery storage and energy as a service.

There are many factors behind this change, including pressure from regulators, investors and consumers to improve environmental, social and governance (ESG) performance. With jurisdictions pursuing energy targets and implementing policies and regulations accordingly, organisations in the sector are shifting to adapt. For many companies, dealmaking offers a chance to propel transformation.

Deal drivers

The escalating climate crisis is a key force impacting policy at all levels. In the US, the Inflation Reduction Act (IRA) has had a positive impact and is creating opportunities over the medium to long term, by expanding access to and providing certainty around tax credits. Since the passing of the IRA in 2022, 62 deals worth $59.5bn have been announced, according to PwC.

Recent easing in inflation, improved economic factors and an emphasis on sustainability strategies have renewed momentum, particularly in renewables and clean energy. Energy transition subsectors including hydrogen, natural gas, domestic manufacturing and carbon capture will continue to attract investment in the coming year.

Supermajors, such as Exxon and Chevron in the US, are increasingly exploring low-carbon ventures such as hydrogen and carbon capture. According to White & Case, renewables and other low-carbon energy solutions are estimated to make up around 30 percent of European oil & gas majors’ total capital expenditure, a figure that drops to less than 10 percent in the US.

“The desire to deploy capital and ESG considerations are certainly driving deals,” says Niamh McGovern, a partner at Arthur Cox. “International investors are looking for long-term assets with a stable revenue that are environmentally friendly and socially responsible.

“The energy transition as a whole will offer huge opportunities over the coming years – not only in renewable energy deployment, such as offshore wind, but also in technologies which enable the transition to a greener grid or assist with security of energy supply. Examples include electricity interconnectors, long duration energy storage and hydrogen development, in due course,” she adds.

The energy landscape is experiencing significant change. Efforts to tackle climate change and push toward net zero will shape deals in the years to come, as will the need to acquire the skills, technologies and infrastructure required to drive the transition.

For Amy McDermott, a partner at Arthur Cox, while it is generally acknowledged that there are significant challenges in this sector, there is a strong willingness and desire within the industry to tackle these challenges, and to accelerate the development of renewable energy in Ireland. “In the face of a global climate crisis, there are significant opportunities in this space, and we expect M&A deal activity to reflect this as Ireland looks to deliver on its ambitious targets set out in its Climate Action Plan,” she says.

“Investor confidence in Ireland’s ability to tackle these challenges by reforming the planning system, developing our electricity grid and investing in critical state agencies will be key to ensuring that Ireland is seen as an opportunity for investment and growth – not only in renewable energy deployment but also in technologies that enable energy transition,” she adds.

Activity trends

Deal value across the energy sector tallied $380.8bn last year, up 8.26 percent on 2022, according to PitchBook’s 2023 Annual Global M&A Report.

Q4 2023 saw ExxonMobil, Chevron and Occidental announce significant acquisitions in the oil & gas space. Total global deal value in January and February 2024 – at $68bn – was the highest since the first quarter of 2017, and more than double the first quarter of 2023.

In terms of upstream M&A activity, Q4 2023 recorded a massive $144bn, according to Enverus Intelligence Research (EIR) – the largest quarter it has tracked. That pushed full-year 2023 value to more than $190bn, also setting a record.

“Oil & gas is undergoing a historic consolidation wave comparable to what occurred in the late 1990s and early 2000s, giving rise to the modern supermajors,” noted Andrew Dittmar, senior vice president at EIR. “After a decade of lowered investment in exploration and with the major US shale plays largely defined, M&A has become the preferred tool to replace declining reserves and secure longevity in these companies’ profitable upstream businesses. For the best quality resource, there are also now more buyers than sellers, driving prices upward.”

According EIR, in 2023 upstream M&A was overwhelmingly focused on oil, with $186bn in deals targeting crude, compared to just $6bn in gas-centric acquisitions. The largest gas deal was announced in December, when Tokyo Gas acquired Rockcliff Energy in the Haynesville Shale for $2.7bn. Last year’s gas M&A total has already been surpassed with Chesapeake Energy merging with gas peer Southwestern Energy for nearly $12bn, including Southwestern’s debt.

An anticipated increase in interest around gas assets is expected this year as the US liquefied natural gas (LNG) ramp approaches, with the US slated to add 10 billion cubic feet per day (Bcf/d) of LNG export capacity over the next three years. That should eventually offer producers relief from low natural gas prices. With gas storage filling and production still strong, gas prices through most of 2024 are likely to be as low or lower than the challenging 2023 market.

In the UK, the energy, utilities and resources sectors recorded over £18.2bn worth of deals in 2023, according to PwC, the highest overall value of any individual industry that year. The largest announced transaction was Harbour Energy’s $11.2bn acquisition of Wintershall Dea’s upstream assets and European carbon capture and storage licences. Another notable deal in the upstream sector was the $4.9bn acquisition of Neptune Energy Group Limited by Eni and Vår Energi. KKR also offered £1.3bn for SMS plc, a smart meter business with growing capabilities in battery storage and carbon reduction.

According to PwC, the US power and utilities space in 2023 saw 46 deals, up from 36 in 2022 but down from 56 during the historically active deals market of 2021. Deal value totalled $39.4bn, up from $36.3bn in 2022 but down from $53.3bn in 2021. However, a single $6.6bn megadeal accounted for 17 percent of deal value in the sector in 2023.

In addition to a focus on renewables and clean energy, contributions from both strategic and inbound investors remained strong. Inbound deals accounted for 60 percent of total deal value, up from 56 percent in 2022 and 35 percent in 2021.

As Ms McDermott notes, from an Ireland perspective, M&A activity has been reasonably strong in the past 12-18 month period, although given the long-term outlook for the sector as a whole, recent activity has been slower than expected. “This is due to a variety of reasons, including the cost of capital, supply chain issues in the market and regulatory uncertainty in certain areas, particularly in respect of planning and the Irish offshore regulatory policy,” she explains. “Notwithstanding this, the outlook remains strong, and we have seen a notable upturn in the market for Q1 2024. There is a significant amount of capital to be deployed by investors and we expect this trend to continue for 2024 as a whole.”

“The offshore sector has been active in terms of M&A activity over the past two-year period, in comparison to equivalent projects onshore,” points out Ms McDermott. “In the offshore sector, we are increasingly seeing international players with significant expertise in deploying offshore projects worldwide enter the Irish market. International players are teaming up with local developers to combine local knowledge with international expertise. This is evident from various joint ventures announced in the market – for example, Orsted and ESB, EDF Renewables and Simply Blue Group and, separately, ESB and Parkwind.”

Offshore wind’s late-stage pipeline M&A, turbine orders and project financial investment decisions (FIDs) saw record activity in 2023, according to Wood MacKenzie. The sector finished 2023 strong with 14GW of FIDs, an 11-fold increase on 2022. Nearly half of FID capacity in Europe was generated in Q4 alone, as a flurry of activity in the UK and Polish markets drove activity to an all-time high by the end of the year.

M&A activity for advanced pipeline projects grew to 10GW in 2023, a 43 percent year on year increase. This brought new players to the offshore market, signalling continued competition and interest from institutional investors in the sector. Deal activity also helped developers with cashflow, allowing them to recycle capital into the offshore wind development pipeline for future projects, notes Wood MacKenzie.

The US shale industry has undergone considerable consolidation. Global M&A deal value in the oil and gas exploration sector reached its highest first-quarter level in seven years, according to Enverus. Future consolidation of the US shale industry is expected in the coming months, amid high stock values and a growing desire among companies to acquire additional inventory.

Deals worth more than $55bn were announced in the first two months of 2024, as publicly traded companies took advantage of their high share price to gobble up smaller firms. Among the most notable of those deals were Diamondback Energy’s $26bn offer for Endeavor Energy Partners and APA Corp’s $4.5bn deal for Callon Petroleum. In addition, Chord Energy and Enerplus agreed to combine in an approximately $11bn stock and cash transaction.

Doing deals

Funding will be key to the energy transition. Finding the right capital sources will be challenging, but a cadre of international investors, including sovereign wealth funds and private equity firms keen on global infrastructure projects, could play a vital role.

“We are increasingly seeing a large amount of both domestic and international banks looking to fund deals in the energy and utilities sectors in Ireland,” says Ms McDermott. “In addition to that, the types of lenders lending into this sector has expanded, and we are also seeing non-traditional lenders, such as pension funds, private capital and others, becoming more and more active. There is a significant willingness by banks and other alternative lenders to support deals in this sector and we foresee that trend continuing.”

In recent years, the cost of capital has increased due to rising interest rates, inflation, supply chain bottlenecks and lengthy interconnection queues. These factors have changed project and platform economics across the industry. “The main challenges include regulatory risk, shifting sands in terms of government policy such as planning, and grid access including transmission system availability and capacity,” says Ms McDermott. “More broadly, inflation, high interest rates and the valuation ‘gap’ continue to impact upon these deals.”

Local knowledge and expertise are valuable for dealmakers in assessing and navigating the regulatory and policy landscape. “Understanding and building relationships with key stakeholders in the decision making and permitting process can assist in progressing projects,” suggests Ms McDermott. “Local knowledge and expertise will assist in building those relationships. Given the ever-evolving regulatory landscape in this sector, building flexibility into the transaction documents is also important to ensure that projects can adapt and respond quickly to this ever-changing and developing regulatory environment.

“This is particularly important in relation to any shareholder arrangements that are put in place in relation to a project company,” she continues. “This flexibility ensures that the individuals responsible for progressing the project on the ground can adapt and adjust as required and not get tied up in overly restrictive shareholder governance arrangements, which, as a result, may result in delays and unintended consequences for the project.”

Under scrutiny

Going forward, the energy, utilities and natural resources space will be scrutinised at COP 29, which begins in November. The industry accounts for almost 15 percent of energy-related greenhouse gas emissions, according to the International Energy Agency. As such, there will be growing pressure on companies to focus on their net-zero obligations.

The shift toward renewable and low-carbon energy solutions will require companies to walk a tightrope. Naturally, M&A will play a vital role in enabling companies to reform their portfolios, integrating both renewables and low-carbon energy solutions to make their net-zero ambitions a reality.

Divestitures should also play a role in helping companies to realign their portfolios and refocus strategic agendas across the power and utilities sector. Corporate leaders will use M&A to keep their organisations relevant and compliant in an evolving landscape. Business reinvention will drive deals in the coming years.

New energy sources are needed to meet shifting energy needs. As governments introduce regulations and incentives to attract investment, dealmaking in the energy, utilities and natural resources space should flourish in the energy transition era.

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Richard Summerfield