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

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,¹ 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.

• 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.

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. 

• 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.  

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.