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Deal activity in the energy, utilities and resources sectors in the first six months of 2022 has been lower than we expected it to be at the beginning of the year, in terms of both the number of deals and the time it is taking to agree to a value and execute a deal.
The current lower velocity is unsurprising, given 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 this uncertainty, we expect M&A activity to be robust in the near to medium term due to:
- an ample supply of capital
- the continuing acceleration of energy transition
- a growing desire for supply chain security
- a perception of value opportunities emerging in the current macroeconomic environment.
We continue to closely monitor discussions around the ethical stewardship of carbon-intensive assets and its potential impact on M&A activity. For example, although a number of companies have already taken steps to demerge or divest their more carbon-intensive assets from their other operations, growing unease that such actions can lead to higher carbon emissions and for longer has led to adverse investor reaction. Potential sellers of such assets will need to rigorously engage with a wide range of stakeholders and adjust their M&A strategy accordingly to avoid accusations of greenwashing and the risk of derailment of their divestment processes.
‘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.’
Mining and metals
- Environmental, social and governance (ESG) factors and supply chain security remain the principal drivers of M&A deal activity in the mining and metals sectors. Corporate— and government—focus on these drivers has only intensified since the beginning of the year.
- Critical minerals, including copper and nickel, continue to attract the most investor interest. Competition is fierce amid an expanding buyer pool, as users further up the value chain look to M&A to secure their supply.
- Some major players are weighting their portfolios in favour of critical minerals and away from more carbon-intensive assets, driven by both the looming supply gap and carbon reduction targets.
- Deglobalisation is gaining momentum, spurred on by COVID-19 and the Russia–Ukraine conflict, which we expect to redraw M&A boundaries and lead to a decrease in the volume and a change in the direction of capital flows in cross-border deals. However, China could prove to be an exception, with an increase in outbound transactions likely in the second half of 2022, as Chinese companies look overseas to shore up supply chains and as China’s recent COVID-19 lockdowns and travel restrictions—which have inhibited the ability of many investors to execute cross-border deals—are lifted.
- Coal, nickel, iron ore and steel have all seen spot price increases in excess of 30% in the first half of 2022. Volatility in commodity prices could lead to a value gap between buyer and seller expectations on price, dampening deal activity in the short term. During the next six months, we expect to see more earnout structures or share-for-share transactions, as a way for buyers to share some of the risk with selling shareholders.
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Oil and gas
- Volatile and high commodity prices have caused global oil and gas M&A to ‘take a breath.’ Should prices stabilise at current or higher levels, we expect a resurgence in M&A activity. We are already seeing some exploration and production (E&P) businesses marketing non-core asset packages and portfolio holdings. However, current value gaps are wide.
- Amid a growing energy crisis in many parts of the world, tensions are developing at the country level between plans to transition to clean energy and the security of the national energy supply.
- We expect to see gas deals in the near to medium term that support national energy security, mixed with M&A that supports emissions reduction over the long term.
- As Europe works to reduce its reliance on Russian gas, there is strong demand globally for natural gas assets and long-term supply contracts for natural gas and liquefied natural gas.
- Although the effects for oil and gas producers that are exiting Russian operations are not yet fully clear, the loss of such low-cost production is likely to be felt across reserves, cash flows and balance sheets. We expect these businesses to respond by consolidating E&P assets in strategic geographies and by continuing to develop existing assets to ensure funding is available for energy transition over the long term.
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Chemicals
- The M&A outlook remains positive despite a slower start to 2022, with deal volumes down around 14% against record 2021 highs but above the last-five-years’ average. Buyers from the US accounted for four of the five largest transactions.
- Macroeconomic events and the lingering impacts of COVID-19 present potential headwinds to some players who face margin pressure due to rising feedstock costs and higher energy prices. However, many of the M&A drivers we saw at the start of the year remain valid:
- Chemical companies will continue their focus on carbon reduction and circularity through divestment and integration of sustainable materials into supply chains.
- Corporates will look to increase supply chain resilience, as disruption in both trade flows and production in certain regions will likely continue, creating an additional impetus for M&A for the remainder of the year.
- Capital remains available for M&A, and competition for quality assets is keeping valuations high, as demonstrated by recent deals and transaction multiples, which continue to trend above pre-pandemic levels.
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Power and utilities
- Inflationary pressures and rising interest rates are beginning to increase the value gap in power and utilities M&A activity.
- We are also seeing supply chain challenges, such as the availability and price of solar panels and other components, impacting the decarbonisation transition, which we expect could somewhat slow the pace of renewables-related M&A activity.
- Sustainable energy targets will continue to create a favourable investment environment, and we expect deal activity and capital investment to remain strong in traditional renewable technology, transmission infrastructure, carbon capture, battery storage, hydrogen and other climate technologies.
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Mid-year M&A outlook for energy, utilities and resources
Recent global and macroeconomic events have put an even stronger spotlight on energy costs and availability amid the larger energy-transition landscape. Those companies with M&A strategies well-aligned to their corporate vision—particularly in high-growth areas such as renewables, carbon capture, battery storage, transmission infrastructure and other clean technologies—will be best placed to create value and sustained outcomes for stakeholders in the medium to long term.
Explore our local M&A trends in Energy, Utilities and Resources from the following countries:
Want to know the M&A trends we expected in Energy, Utilities and Resources at the beginning of 2022?
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National Deals Energy, Utilities, Mining and Industrials Leader, Partner, PwC Canada
