Global M&A Trends in Energy, Utilities & Resources

M&A remains a pivotal strategy for mining and metals companies aiming to protect their competitive advantage, expedite their transformations and secure essential resources for future growth.

The first half of 2024 has seen continued robust dealmaking activity, although some deals are facing delays in obtaining required regulatory approvals and others are stalling because of the persistent gap in pricing expectations between buyers and sellers. Below are key trends we expect to see in mining and metals M&A in the second half of 2024.

• Consolidation is expected to continue to be a dominant M&A trend as mining and metals companies leverage this strategy to reconfigure their asset portfolios and refine their future business directions by reallocating capital towards strategic growth opportunities.
  

• Critical minerals deals have been robust and show no indication of abating as companies seek to secure future supply. The race to secure supply is not limited to mining companies and financial investors but also extends downstream and to a new investor base such as sovereign wealth funds looking to diversify their investments based on attractive fundamentals.
  

• Partnerships with entities outside the mining sector, such as local governments and technology firms, are likely to remain appealing. These partnerships can expedite transformation, share risks, and reduce capital commitments, which is particularly advantageous under the watchful eye of cost-conscious investors.
  

• Sustainability continues to be a cornerstone in shaping long-term stakeholder value and providing a competitive edge. Its importance in the mining sector has made it a critical factor in M&A decisions, sometimes even being the primary driver behind transactions. As sustainability reporting standards evolve, companies that are proactive in implementing sustainability initiatives stand to benefit from further value differentiation compared with their peers.
  

Despite short-term challenges from macroeconomic and geopolitical uncertainties, the mining sector’s M&A activity is poised to remain robust going forward—a core fundamental is that mining is inextricably linked to the success of most other global industries.

The surge in oil and gas M&A activity during 2023 continued in the first half of 2024, with a number of corporate mergers announced in North America and Europe. Factors driving M&A include security of supply, asset portfolio balancing and diversification, synergy realisation and improved production economics on investments at current commodity pricing.

Following the recent spate of consolidation deals, we expect to see an uptick in corporate divestitures as the recent corporate acquirers look to optimise portfolios by carving-out newly acquired assets that are deemed non-strategic. For example, when announcing its acquisition of Hess, Chevron signalled its intention to increase asset sales and generate $10bn to $15bn in proceeds through 2028. Other acquirers in recent major acquisitions may not yet have announced their divestment targets, but we expect some to take a similar path to Chevron.

Demand for liquefied natural gas (LNG) continues to grow globally because LNG is strategic and critical for electrification and to support both the industrial and petrochemical sectors. We expect to see continued consolidation across firms operating in LNG transportation, storage and refinement in order to fill out overall capabilities, improve pathways to markets, and realise synergies and efficiencies that only occur on a consolidated basis. Uncertainties relating to the upcoming US elections, together with recent administrative decisions to limit new LNG permitting in the US, are likely to restrict any new greenfield LNG projects in North America.

Globally, government policies, regulations and incentives are steering investments and improving the capital resource pool for traditional oil and gas companies to make clean energy investments. Examples include the IRA, the US Infrastructure Investment and Jobs Act, the European REPowerEU Plan and the European Net-Zero Industry Act. As a result, oil and gas majors are directing their investments towards the development of carbon capture, utilisation and storage (CCUS) technologies and digital technologies that support the achievement of environmental targets. We may see a further push to take advantage of US incentives in advance of the US elections in November 2024.

The cyclical nature of oil and gas, combined with the transition towards clean energy (with its typically more modest returns), requires companies to balance their M&A activity in a way that allows them to take advantage of high energy prices until oil demand peaks in a few years—while providing durability and elasticity as demand for oil and gas products then slowly falls over time.

Below are the key trends we expect to see behind power and utilities M&A in the second half of 2024.

• Renewables fuel M&A activity
  Significant growth in the volume of new renewable assets has spurred M&A activity in the power and utilities sector. The IRA has played a pivotal role by providing substantial incentives for clean energy investments, leading to a notable increase in investments in renewable energy projects, particularly solar and wind, as well as in emerging technologies such as hydrogen and battery storage. M&A activity in Asia has been driven by large renewable platforms trading at significant premiums. Acquisitions involving partnerships with international firms seeking to leverage Chinese technology and gain market access are taking place, alongside investment in the development of clean technologies.
• Sustained rates motivate sellers
  Persistently higher interest rates have had a dampening impact on the power and utilities sector through the first half of 2024, despite the fundamental inverse relationship that rates typically have with long-duration bond-like cash flows. With no clear line of sight to rate cuts, the sector is now experiencing a period of revaluation.
  
  Higher financing rates, along with rising construction and development costs, have enticed several renewables developers with less capital to either monetise their assets or sell their entire platforms. Longer lead times and costs associated with congested interconnection queues have further motivated developers to seek liquidity.
  
  Meanwhile, volatility and depressed share price valuations continue to encourage publicly-listed utilities and generators to recycle non-core assets to fund development pipelines rather than issuing equity at perceived higher cost of capital. Notably, gas distribution and generation assets have represented a significant proportion of deal value in the past six months, reflecting decisions motivated by environmental, social and governance (ESG) concerns to divest such non-core assets. Thermal assets, which have a more limited buyer universe, have repriced, giving higher returns to sophisticated corporates and private equity players.
  
• The valuation gap between buyers and sellers persists
  A number of recently failed auction processes suggest that there remains a significant bid/ask spread between buyers’ and sellers’ valuation expectations. This has created a stalemate with temporary illiquidity in the sector. The European Central Bank’s announced interest rate cuts in June may begin to close the valuation gap between buyers and sellers and entice additional assets to market.
• Pricing intervention impact on M&A
  Meanwhile, affordability concerns across the globe—due to cost inflation, onshoring of supply chains and shortfalls in power generation—have motivated restructuring efforts in several power markets. New European levies implemented on generators are intended to limit extraordinary returns and provide relief to ratepayers. However, a similar situation in Alberta, Canada, where a price cap has been introduced to limit generator profits, has had the effect of stalling significant development in the region. These actions are likely to curtail M&A activity until their implications are understood and absorbed.
• Overall power and utilities outlook
  We anticipate that growth in both traditional renewables and clean technologies will continue to thrive over the long term. This will underpin a significant portion of M&A transaction flow in the second half of 2024 and beyond. With sustained rates and motivated sellers, we further anticipate that a narrowing of bid-ask spreads will add velocity to M&A. Last, with a focus on affordability for ratepayers, we believe utilities will conserve capital and recycle non-core assets where necessary, with a continued focus on gas-related assets. Acquisitions of utilities will likely be limited to financial buyers seeking regulated greening opportunities and/or transmission build outs to support the growing grid.

In the first half of 2024, deal value and volume in the chemicals industry remained lower than the historical average. This was attributable to several factors including elevated interest rates, weak industrial demand, sustainability objectives, and ongoing geopolitical tensions with increased regional conflicts. Chemicals deal volumes in Europe are now at their lowest level in a decade.

However, executives are gaining confidence that a global recession is less likely and that central banks will start to cut interest rates to stimulate growth later this year. We anticipate chemicals M&A activity to rebound in the second half of 2024 as economic and political uncertainties ease in major countries. A renewed focus on domestic industrial policy and global supply chain realignment, coupled with an increased number of private equity exits, will likely lead to more assets on the block, driving deal activities.

• The 60-plus countries undergoing elections in 2024 have the potential to affect regulations and policies, and in turn chemicals M&A activity. 
• We anticipate increases in M&A and investments in countries that connect trading alliances, offer access to vital feedstocks and have fewer restrictions on foreign investment, commonly referred to as ‘friendshoring’.
• The US is becoming a more lucrative destination for M&A activity in chemicals because of the shift to reshoring, attractive economic incentives, advanced energy infrastructure and the advantage of access to key raw materials. Conversely, Europe is now one of the most expensive places globally to produce petrochemicals, with overcapacity reducing cracker margins and operating rates across the region. In the first half of 2024, several major European chemicals producers announced the closure of their European crackers.
• The ageing of private equity portfolio companies is expected to bring more assets to market. Companies may seize this opportunity to engage in transformative deals, consolidate market positions, and capitalise on synergies and economies of scale.
• The ongoing dynamics of divesting non-core assets, optimising portfolios, scrutinising supply chains, decarbonising operations, liquidating non-ESG-friendly assets and fulfilling sustainability obligations are expected to play a significant role in driving M&A activities.
• Sustainability and regulatory factors continue to drive investment and optimisation of operating activities within Europe. Carbon Border Adjustment Mechanism legislation will come into effect from 2026 for certain segments, with the scope of the framework to safeguard the chemicals sector currently under discussion. The European Commission recently enacted anti-dumping legislation on imports in the polyester value chain.