Deal activity in the energy, utilities, and resources sectors in the first six months of 2022 have been lower than what was expected at the beginning of the year. This lower activity can be seen in both the number of deals being made, and the time it is taking to agree to a value and execute a deal, according to consulting firm PwC.
The current lower velocity is unsurprising and most likely due to the uncertainty in deal pricing caused by inflation, interest rates, geopolitical unrest, and volatility in commodity prices — all of which have increased since the beginning of the year.
However, despite the uncertainty from earlier in 2022, M&A activity in the energy sector is expected to increase due to several factors, including
- An ample supply of capital.
- The acceleration of the energy transition.
- A growing desire to control issues related to the supply chain.
- A general perception of value opportunities in the current macroeconomic environment.
“Uncertainty has given dealmakers good reason to draw breath, but this won’t be for long as climate and supply chain imperatives — plus the desire to pursue value opportunities — will quickly have them back at the table,” notes Wim Blom, Global Energy Utilities and Resources Deals Leader, Partner, PwC Australia.
However, in examining the areas of most opportunity for the energy sector, an interest in reducing or divesting carbon-intensive assets continues to impact M&A activity. This is driven by several large companies seeking to reach net-zero emissions goals.
5 M&A Trends in the Energy Sector
The following are five trends that are expected to impact M&A activity across the entire energy sector, including fossil fuels and renewables.
1. Oil and Gas Majors Taking Advantage of Soaring Prices
While the energy transition has been accelerating and is well underway, high oil prices have created opportunities for buyers and sellers in both fossil fuel and renewable companies. In this way, deals can balance both economics and the environment simultaneously. This is done by allowing buyers to acquire higher-margin assets, while driving increased cash flow and pursuing environmental, social, and governance (ESG) initiatives.
Larger oil and gas players who have taken the long view are still likely to divest higher-carbon assets and decarbonize operations in order to benefit from valuation upsides presented by higher oil prices.
2. ESG Taking a Much Larger Role in Dealmaking
ESG-related investments of $1.7 trillion account for about 10% of worldwide fund assets across industries, notes consulting firm Deloitte. However, only 10% of oil and gas deals in 2021 cited ESG as their key deal consideration to stakeholders.
This is likely to change moving forward, as the “E” — the environmental portion — is not the only factor in dealmaking. Social (“S”) and governance (“G”) as outstanding social responsibility, local participation and partnering, diversity in management and workforce, and good governance business practices are also equally important in ensuring a successful deal closure.
Additionally, investors look for other components of deal success, such as the ability to execute the deal, the realization of synergies, robustness, and swiftness of the post-transaction integration, cultural fit, and many other factors that influence shareholder returns.
In fact, most buyers that displayed strong shareholder returns had consistently performed well across all three ESG categories — not just “E.”
3. Expanding into New Energy Businesses and Business Models
According to Deloitte, major oil and gas companies leveraged M&A to add around 80 GW of renewable capacity between 2018 and 2021. This represents 9% of global renewable capacity additions across various industries during the same period. However, most of these additions were integrated solar plus storage.
With an eye toward expansion, buyers and sellers are seeking opportunities in relatively newer renewable sectors, including standalone battery storage, carbon capture and sequestration, and hydrogen projects. New technologies and their associated applications are forcing new business models and capital structures to contend with non-contractual revenue streams, shorter project life cycles, and new valuation methodologies, cites FTI Consulting.
For example, an emerging business model is Energy-as-a-Service, in which third parties design, develop, deploy, and manage energy projects on behalf of organizations, freeing up capital and sharing risk. AlphaStruxure, a joint venture of Carlyle Group and Schneider Electric, is an example of a firm offering Energy-as-a-Service to its clients.
“All of this spells opportunity for those capital market participants that can be innovative, flexible, and apply new thinking to these new and expanding market opportunities,” notes FTI Consulting.
4. Changing Role of Energy Information Services
Aside from the developers and distributors of energy, another growing area is energy information services (EIS), which includes the engineering firms, professional services providers, and data and analytics vendors that are helping to drive interest — and stronger valuations — across the industry.
Such companies, many of them still startups, help deliver efficiency and transparency to the industry. Renewables providers fully understand the need to bake analytics and even AI into their offerings in order to help investors make stronger decisions.
While EIS deals tend to lag behind the broader industry, they could be especially attractive targets for larger players seeking access to data they could otherwise not source on their own. An example of an EIS deal was the acquisition of utility rate database supplier Genability by community solar provider Arcadia Power in early 2021.
5. A potential Shift in Private Equity Interest Away from Oil and Gas
In the past decade, private equity firms have increasingly emerged as a powerful investment force in oil and gas, investing about $1.1 trillion in the energy sector since 2010, according to Deloitte.
The vast majority of their holdings (at about 80%) since 2010 have been in fossil fuels oil, gas, and coal. This is because private investors sought to acquire undervalued assets when global oil markets faced price and supply upheavals a few years ago.
This is quickly changing, as PE firms have quickly shifted interest into renewables thanks to the increasing cost-competitiveness and increasing valuations of renewable projects.
How to Ensure That Information Remains Secure During an M&A Transaction
As M&A deals in the energy sector are expected to increase this year and beyond, buyers and sellers will need to leverage technology that can support the transaction every step of the way.
Having a trusted virtual data room (VDR) partner is critical to ensuring proper deal timing, efficiency, and management.
CapLinked offers a world-class VDR that can ensure that highly-sensitive documents can be shared securely across any platform and any device. This is key to helping mitigate some of the bottlenecks that can occur throughout the lifecycle of the M&A deal, from evaluation to due diligence to post-merger integration.
Ensuring that those responsible for the review of a particular document do so in a timely manner is essential for the review process. CapLinked’s Activity Tracker feature enables workspace administrators to track and compare activity across multiple groups. For example, this allows the sell-side to anticipate which leads may be the most interested in the deal, and the buy-side to track the progress of multiple potential acquisitions at once. Data like this is invaluable to M&A teams as they strategize how to follow up and plan the early stages of a deal.
Once a deal moves into the due diligence phase, CapLinked’s VDR ensures that with the strongest security measures in place, all parties can be confident that their review of highly sensitive material will not be compromised and that the tools included will help expedite the entire process. Data and documents flow more smoothly, shaving weeks, if not months, off of the entire M&A timeline.
Start your free trial today to see how CapLinked can help streamline all aspects of the mergers and acquisitions process.
Jake Wengroff writes about technology and financial services. A former technology reporter for CBS Radio, Jake covers such topics as security, mobility, e-commerce, and IoT.
Deloitte – 2022 Oil & Gas M&A Outlook
Bain & Co. – M&A Opportunities in the Energy Transition
FTI Consulting – U.S. Renewable Energy M&A: Review of 2021 and Outlook for 2022