The energy, utilities and resources (EU&R) sectors are seen as a bright spot for M&A activity in 2024, despite the backdrop of general economic uncertainty. We expect EU&R sectors to continue to trend favourably in 2024 in terms of deal value and volumes.
Capital continues to flow into the EU&R sectors as investors place bets on the importance of the energy transition in society achieving its net zero goals. We continue to see significant interest from broader capital pools, directing funds to M&A and into greenfield and brownfield projects. With capital likely to flow away from assets that are not compatible with a net zero transition and toward opportunities that are, some subsectors may inevitably struggle to secure necessary financing. In these situations, companies with the strongest balance sheets will be well positioned to take advantage of potential deals and the opportunity to create value.
The pace of transformation required to fuel the energy transition has lagged behind expectations. Will 2024 be the year we see a significant uptick in transformational deals across the EU&R sectors? For some time, environmental, social and governance (ESG) has been the key driver of deals in the EU&R sectors. In recent months, however, it appears to be taking a back seat in certain sectors as economic headwinds dictate capital priorities in the short term. Will this trend continue through 2024, or will we see a resurgence of ESG-focused deals in 2024? We continue to believe that energy transition and sustainability will remain critical drivers of deals in the EU&R sectors for the foreseeable future, and we expect stakeholders to refocus efforts on these areas in 2024.
Source: PwC's 27th Annual Global CEO Survey
In PwC’s 27th Annual Global CEO Survey, EU&R CEOs reported being twice as likely as other industry CEOs to be extremely or highly concerned about the risks climate change presents for their companies in the next 12 months. Together with the COP28 landmark deal struck in December 2023—to transition away from fossil fuels—we expect this concern will only grow as CEOs take necessary actions to transform their business models and invest in the energy transition. This, in turn, will positively affect M&A activity in both the near term and medium term.
In addition to the broader theme of energy transition, we discuss further why consolidation, government regulation, security of supply and portfolio optimisation will all be key themes affecting EU&R M&A activity in 2024.
“Globally, M&A will continue to play a key role in the pursuit of strategic energy transition objectives as businesses seek transformational opportunities for future growth and prosperity.”
Michelle Grant,National Energy, Utilities, Mining and Industrials Deals Leader, Partner, PwC CanadaThere’s been a lot of discussion about the convergence of activities across industries, sectors and sources of capital over the past few years as businesses position themselves for the energy transition. One prevalent example of this is the intersection of several industrial manufacturing sectors with energy, power and utilities and the mining sectors as a result of growing demand for electric vehicles (EVs).
Source: PwC
The EV value chain starts with the raw materials that are required to eventually produce the battery and other key components of an EV and ends with the recycling of vehicles at the end of their useful life. There are growing interdependencies at each stage of the value chain. For example, clean energy will ultimately power the mines that are the source of the minerals and metals used for EV batteries and other components, and the vehicles working at the mine sites will be autonomous.
Several players are repositioning to capitalise on this transition and using transactions to drive transformation, including the following:
Energy companies repositioning for the future by, among other things, purchasing lithium properties. For example, in November 2023, Exxon Mobil announced plans to become a leading producer of lithium by drilling in Arkansas—an area it acquired the rights for earlier in the year—and evaluating other growth opportunities globally.
Original equipment manufacturers (OEMs) that are investing directly in mining companies or negotiating offtake agreements to ensure security of supply for the EVs of the future. For example, General Motors (GM) announced a US$650m equity investment in Lithium Americas to jointly develop a lithium mine in Nevada, with lithium carbonate mined under the agreement to be used in GM’s battery cells for EV production. Ford Motor Company has also signed new lithium offtake agreements with certain raw-material suppliers, and Tesla signed an agreement with Australia’s Magnis Energy to supply battery anode materials.
The entire EV value chain has been a major contributor to M&A growth in the EU&R sectors over the past few years, and we expect that to continue in 2024 as companies position themselves for a future in which EV vehicles are the dominant vehicle on the global market and internal combustion engine (ICE) vehicles are a thing of the past. These companies, together with multiple other stakeholders, will work together to transform business models, create sustained outcomes and make the energy transition a reality.
While the energy transition remains the main theme driving activity across the EU&R sectors, several other themes are prevalent.
We continue to see consolidation as a key theme across the EU&R sectors to improve economics and continue to build size and scale. Several large deals announced during 2023 are examples of such consolidation plays, including Exxon Mobil’s planned US$59bn acquisition of Pioneer Natural Resources, Chevron’s planned US$53bn acquisition of Hess and Newmont’s US$17bn acquisition of Newcrest. We expect this trend to continue through 2024.
Government regulation continues to drive M&A, whether through tax incentives, government-backed pools of capital, policy changes to enhance investment or government intervention in specific projects.
Since the US Inflation Reduction Act (IRA) was passed into law in mid-2022, its impact has not only spurred significant investment in the EU&R sector in the United States but also led to Europe and other countries creating their own incentive packages. For example, Europe’s Green Deal Industrial Plan and Japan’s draft Green Transformation Act aim to increase the level of investment in a range of low-carbon infrastructure projects, with the goal to boost the competitiveness of their own net zero emission industries and accelerate the transition to carbon neutrality.
The subsectors we expect will benefit most from government incentives are batteries (including critical minerals) and energy storage, hydrogen fuel, and infrastructure investments related to longer-term carbon capture projects, creating additional opportunities for M&A.
We expect a heightened focus on government regulations in the context of geopolitical risk that will assist in either attracting or detracting from investments in various regions as deals are assessed in 2024.
Security of supply is a prevalent theme across the EU&R sectors, particularly when thinking about future growth opportunities linked to the EV value chain (affecting all EU&R sectors), and in power and utilities when thinking specifically about energy security. Increased geopolitical tension will likely keep security of supply high on CEOs’ agendas.
Security of supply, together with increases in energy and infrastructure prices, has also led to growth in behind-the-meter energy management and on-site generation solutions. From technology companies powering their data centres with solar panels and wind farms to big-box retailers building rooftop solar and biogas capabilities to power their stores and distribution centres, the number of companies generating their own energy on-site is soaring. We expect supply concerns, energy prices, and the increasing availability of technology and digital energy platforms will continue to channel strong levels of investment in these areas in 2024.
During times of uncertainty, companies need to reassess their portfolio against their core strategy to make critical decisions about investments. We see portfolio optimisation as continuous practice, but in the current economic environment, it may also be a necessity. Portfolio optimisation can take on many forms, such as a decision to divest or spin off non-core assets. In other cases, assets might be marked for performance improvement to deal with underperformance or to prepare for further economic headwinds.
M&A volumes and values in EU&R increased from 2022 to 2023 by 1% and 26%, respectively. While dealmaking declined in many other sectors, EU&R remained active, with investors attracted to the sector due to its importance to the energy transition, as already discussed above. The increase in deal values in 2023 was partly due to an increase in the number of megadeals (transactions with a value of more than US$5bn), which grew from six in 2022 to 15 in 2023. The majority of these were in the oil and gas and mining sectors. Five of the 15 megadeals in 2023 were announced during the fourth quarter and accounted for almost US$150bn in deal value, providing some positive dealmaking momentum into 2024.
With significant access to capital, a continued appetite for investment, a drive to accelerate the path to net zero and increased government regulation, we anticipate dealmaking in 2024 will be fruitful in the EU&R sectors. Companies with strong balance sheets will have the most success because economic headwinds will keep some businesses from participating in the short term. For companies or capital pools that have been waiting on the sidelines, the tailwinds for many EU&R sectors are showing signs that 2024 could be the breakout year for transformational deals. Are you ready for it?
National Deals Energy, Utilities, Mining and Industrials Leader, Partner, PwC Canada
Greg Oberti
National Energy Transition & Utilities Deals Leader, Partner, PwC Canada
Tel: +1 403 509 6621
Matthew Alabaster
Strategy&, UK Energy, Utilities & Resources Deals Leader, Partner, PwC United Kingdom