Energy: US Deals 2023 outlook

Midstream deal activity likely to advance

We expect midstream deals to accelerate over the next two years as several pipeline construction projects are completed. Several other new lines have been built to bring natural gas to LNG plants on the US Gulf Coast. While new construction remains a challenge, the federal government has eased permitting restrictions.

Midstream companies may look to expand their existing networks and interconnects. The growing demand for natural gas may encourage customers to sign take-or-pay contracts that would encourage midstream companies to acquire additional capacity if they can see guaranteed production upstream. However, like upstream companies, pipeline operators must reassure investors that they aren’t sacrificing cash for growth.  

OFS look for deals in renewables

Service companies continue to shore up renewables offerings with small acquisitions, including the addition of service offerings for wind and solar installations. These are not transformative deals. The core business is still servicing fossil fuel production, but these transactions show investors that service companies are serious about decarbonization.

In serving renewables, oilfield services providers face growing competition from utilities, which will encourage increased acquisitions of smaller renewables servicing companies.

Even though producers are drilling fewer new wells in recent years, they are completing existing reserves. That, in turn, has improved service company margins, giving them more cash for acquisitions in renewables. 

Downstream looks to repurpose assets

With few new refineries being built — because of the expense and environmental regulations — downstream deal activity remains sluggish. However, as refineries increase their ESG initiatives — switching to biofuels, hydrogen and renewable diesel — we may see some acquisitions around these offerings.

In addition, refiners looking to reduce carbon output — and generate decarbonization tax credits — may acquire or install carbon capture technology. The Inflation Reduction Act offers incentives that make biofuels and hydrogen production more economical, which could drive additional deals, especially from private equity investors. 

Navigating policy uncertainty

Russia’s war in Ukraine continues to be the biggest factor affecting the global energy industry. Natural gas shortages in Europe have caused record price increases, and supplies remain constrained. That has boosted demand for LNG exports, especially from the US. The war’s impact is likely to be felt in European energy markets for years and may have permanently altered the demand-and-supply landscape of the continent as countries look to other gas suppliers.

The passage of the Inflation Reduction Act and other policies aimed at fighting climate change and reducing carbon emissions are shifting incentives away from oil and gas development. Oil and gas companies face a challenging environment as they try to adjust their asset base and appease investors who want them to lower emissions.

Those sentiments will continue to drive deals in 2023 as companies attempt to add more renewable and cleantech assets to their portfolios.

At the same time, the higher cost of capital and growing concern about where the economy is headed create questions that remain unanswered. This includes whether the Federal Reserve can tame inflation without triggering a recession. Most economists expect interest rates to continue to rise, which could put a damper on deal activity.

Speed to unlocking value

Other industries working to reduce their carbon footprint may drive long-term deals focused on developing blue hydrogen, which is hydrogen made from natural gas in which the emissions are offset by carbon capture. The Inflation Reduction Act creates longer-term incentives that may make investing in blue hydrogen development more attractive.

Hydrogen investment could appeal to both upstream and downstream players in the sector. It offers the potential for an alternative, clean-burning fuel that could have widespread appeal across a range of industries. 

Increasing security and resiliency

Decarbonization efforts can both add to and detract from energy security. On one hand, renewables are generated domestically, which make them immune to global geopolitical disruptions. On the other, the US market will remain heavily dependent on fossil fuels for years, if not decades. Making the switch to widespread, reliable use of renewables will take decades of continued investment.

In the short term, the energy sector continues to wrestle with supply chain disruptions from the COVID-19 pandemic that continue to affect the industry’s ability to find raw materials such as steel for drill pipe.

In addition, cybersecurity remains a major concern for the industry following a high-profile ransomware attack in 2021. Companies have increased cybersecurity to protect infrastructure assets and they are assessing the resiliency of their cyber footprints. Many are moving systems that they have previously operated in-house to cloud platforms. 

Decarbonization and energy independence

Record energy industry profits and strong global commodity prices could encourage more deal activity, especially among companies looking to diversify their holdings and invest in decarbonization technology. Policy incentives, such as the Inflation Reduction Act, could drive more traditional oil and gas companies to invest in renewables and carbon capture technology.

Efforts to reduce Europe’s dependence on Russian gas in the wake of the Russia-Ukraine war will increase demand for US LNG shipments to the continent. That could, in turn, drive deal activity for natural gas assets such as pipelines and gathering systems.