A spark of hope: Energy M&A growth is on the horizon

Deal making in the Energy market has seen a slowdown in activity in recent years. Bryan Benoit, Principal and Global Head of Energy & Natural Resources at Grant Thornton (US) said confusion over ‘what happens next’ in energy has kept a lid on M&A activity over the past 12 to 18 months.

“There are lots of questions which either haven’t been answered or can’t be answered, questions about the timing of our energy transition, about when we’ll reach peak oil, how much growth is left in traditional energy sources, and more,” said Mr Benoit.

“For all these reasons, we’ve seen less merger and acquisition activity in the energy industry in recent times.”

However, according to our M&A Energy, Utilities, Materials and Industrials (EUMI) report, as global electricity demand surges and the macroeconomic landscape shifts, there are signs that a new wave of dealmaking is on the horizon.

Key Takeaways:

• Economic uncertainty, inflation and high interest rates, dampened investor enthusiasm for green energy projects.
• Electricity demand is predicted to grow at its fastest rate since 2020. This surge is being driven by factors such as strong economic growth, extreme weather events, and the electrification of various sectors (IEA).
• Three current M&A opportunities in the energy market: business consolidation for stakeholder stability and growth, a transition to clean energy and the rise of electricity demand.
• Companies seek M&A opportunities to acquire assets that generate higher profit margins even in a low-oil-priced environment. This improves cash flow and attracts investment.

The current M&A trends and market conditions

Economic uncertainty, particularly regarding inflation and interest rates, has dampened investor enthusiasm for green energy projects. Additionally, geopolitical tensions have disrupted traditional energy supplies which has caused price volatility. These factors have combined to create a cautious environment for M&A activity.

According to data in the Ansarada Deal Platform, growth in the 12 months ending 30 June 2024 dropped 7%, with quarter-on-quarter growth to 30 June down 11%. Even so, the second quarter of 2024 marked a steep improvement on the prior corresponding period – up 138%.

Despite these numbers, the tides appear to be turning. The global demand for electricity is projected to surge, driven by factors like economic growth, electrification trends, and the adoption of technologies like AI. This presents a significant opportunity for the Energy sector, and companies are looking to consolidate and scale up to meet this demand.

What are the current opportunities in Energy M&A?

• Consolidation for stability and growth: Larger companies are acquiring smaller players with strong asset bases, particularly those offering high-profit margins even at lower oil prices. This allows them to diversify their portfolios, improve their margins, and provide investors with predictable cash flow.
• The green transition: Despite the recent slowdown, insights from the report underscore the long-term influence of the energy transition on M&A activity. As economies strive to decarbonize their grids, there will be a growing demand for clean energy solutions and the materials needed to support them. Acquisition will be a key strategy for companies to gain access to these resources and technologies.
• The rise of electricity demand: The International Energy Agency (IEA) predicts that electricity demand will grow at its fastest rate since the onset of COVID in the coming years. This surge is being driven by factors such as strong economic growth, extreme weather events, and the electrification of various sectors.

A cautiously optimistic future for the M&A energy market

While there are still challenges to navigate, the trends paint a picture of a cautiously optimistic future. Increased demand for electricity, coupled with the need for clean energy solutions, is expected to drive M&A activity in the coming years. Companies that can successfully navigate the current landscape and position themselves for growth in the evolving energy market will be well-positioned to thrive.

Large, established companies like Exxon Mobil and Chevron are actively pursuing acquisitions to gain greater buying power and scale. Smaller companies are also looking to acquire assets that can generate higher profit margins, even in a low oil price environment.

“These companies would then use that to go to investors and say: ‘I'm going to provide you with a very stable, predictable cash flow stream and we’ll dividend out profits to you’ – and that's attractive to many investors,” said Mr Benoit. The energy industry is poised for a surge in M&A activity as global electricity demand continues to rise. While uncertainty surrounding the energy transition persists, the favorable macroeconomic environment and the growing need for energy are creating a compelling opportunity for dealmaking.

Remember: This is just one piece of the puzzle. Our M&A EUMI Outlook Report explores trends across all four industries. For a more comprehensive view, be sure to download a copy of the report.

FAQ

What’s igniting the energy M&A boom?

The energy M&A landscape has significantly increased due to:

• The advancement of AI and the increased demand for data centres.
• The electrification of various sectors (IEA)
• Energy transition
• Geopolitical stabilisation

What is the largest energy M&A deal?

The largest energy M&A deal was announced in 2023 when Exxonmobil acquired Pioneer Natural Resources for an estimated $60 billion. This deal positioned ExxonMobil to become the largest shale oil and gas produced in the country.
Answer

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