Deal volumes and average deal values in the energy, utilities and resources (EU&R) sector fell throughout 2022. Despite this, we believe energy transition will remain a key priority for investors and management teams in 2023 and into the foreseeable future—and we expect those groups to continue to allocate large volumes of capital to mergers and acquisitions (M&A) and other capital project development activity in EU&R. We also see an increasing focus on supply security, especially for energy, renewables and critical minerals, as a significant M&A driver for management teams in both the EU&R sector and industrials businesses.
There is no question that traditional sources of debt capital today are more expensive and harder to obtain. However, high commodity prices have strengthened the balance sheets of many EU&R businesses. We have also seen the emergence of alternative debt providers, such as credit funds. These two factors have reduced dependence on traditional bank debt as a means of financing M&A, meaning management can, and will, continue to pursue acquisitions.
Over the past year, we have seen multiple examples of transactions that involved businesses converging into different sectors or subsectors. Examples include chemical businesses buying into renewables projects, oil and gas companies buying electricity retailers, and automotive OEMs buying into or directly securing product offtake from the miners of critical minerals. We expect that this convergence trend will continue to accelerate and broaden, bringing with it new investors to, and added complexity in, the EU&R M&A market, particularly when framed in the context of supply chain resilience.
“Convergence across and into the EU&R sector is accelerating and broadening as companies continue to shape—and reshape—their asset portfolios to align with their strategic energy transition opportunities and ambitions.”
M&A hot spots
We expect the following areas to be M&A activity hot spots during the next six to 12 months:
- Biofuels
- Critical minerals
- IOC upstream assets
- E-mobility investment
- Behind the meter/fence and on-site generation solutions
- US Inflation Reduction Act (IRA) of 2022
Biofuels
We are seeing international oil companies (IOCs) focus on biofuels through the acquisition of renewable natural gas plays. Expect more activity in broader biofuels as IOCs seek to scale up and develop global businesses in this area.
Critical minerals
Majors will continue to look for strategic partnerships, and we expect industrial players to increasingly pursue direct ownership or direct offtake arrangements with critical minerals producers and developers.
IOC upstream assets
IOCs will continue to rebalance their upstream portfolios to meet carbon reduction targets, and national oil companies (NOCs) are set to benefit from the divestment of those assets.
E-mobility investment
Investment across the e-mobility value chain will continue to surge as energy providers and utilities look to extract value in everything from battery components to charge point operators.
Behind the meter/fence and on-site generation solutions
Driven by energy and infrastructure price increases, security concerns and the availability of technology and digital sharing energy platforms, we expect strong levels of investment in these areas to continue.
US Inflation Reduction Act (IRA) of 2022
The IRA is a game changer for energy transition investment in the United States. We expect it to drive a shift in focus to and an acceleration of investment in the country and away from other territories, although a continued strong US dollar may make foreign investment into the US more challenging.
M&A resets to pre-pandemic levels in 2022
Energy, utilities and resources deal volumes and values, 2018-2022
Sources: Refinitiv, Dealogic and PwC analysis
M&A volumes and values in EU&R decreased between 2021 and 2022 by 17% and 37%, respectively. The decline was consistent with the broader M&A market, which came off a record year of dealmaking in 2021. That quickly changed as macroeconomic and geopolitical headwinds grew and the war in Ukraine triggered an energy crisis, creating greater uncertainty among dealmakers. In spite of the challenging environment, M&A activity in 2022 reset to pre-pandemic levels in the chemicals, oil and gas, power and utilities sectors. Mining and metals M&A activity remained below pre-pandemic levels mainly due to lower deal volumes in Asia Pacific and EMEA. The decline in deal values was greater than the decline in activity, partly due to a decline in megadeals—transactions with a value in excess of US$5bn—which more than halved, from 19 in 2021 to nine in 2022.
Mining and metals
Security of supply will continue to be a key driver of M&A activity across the sector. Geopolitical uncertainty and the ramifications of ongoing sanctions are leading miners to consider their strategic partnership options once again and to reconsider synergies they may previously have disregarded.
We expect to see M&A activity resulting in the domestic consolidation of players within territories as governments place requirements on producers to build local supply chains and reduce their use of imported critical minerals where they have access to their own domestic supplies.
Carbon reduction targets will continue to drive demand for critical minerals. However, in response to increased market uncertainty, processes are likely to be lengthy, and closing deals may take more time. Battery minerals such as copper and lithium will continue to be highly sought after. Majors will continue not only to look for strategic partnerships, but also to invest time ahead of transacting to understand the synergies an acquisition can bring to their portfolio. We expect industrial players to increasingly pursue direct ownership or direct offtake arrangements with miners of critical minerals.
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Oil and gas
Market uncertainty (such as commodity price volatility, pace of energy transition, the impact of windfall taxes, and geopolitics) in the near to medium term will likely create a dealmaking environment that favours midsize and smaller bolt-on deals that add new capabilities rather than larger and more transformational deals, which carry greater risk.
Across IOCs and NOCs with energy transition diversification strategies, we expect strong cash flow from hydrocarbons will continue to feed low-carbon investment opportunities (such as renewables, electric vehicle charging, biofuels and hydrogen). Trading and marketing and retail/convenience businesses across IOCs will play an important bridging role between legacy hydrocarbons and low-carbon portfolios. We expect more M&A in this area in order to build capabilities. Independents and private wealth will have significant capital to deploy for hydrocarbons and low-carbon plays, respectively.
As IOCs divest non-core hydrocarbon assets, we expect greater scrutiny of environmental, social and governance (ESG) credentials and divestment strategies. It will become harder for financial investors to pick up assets and exploit them without addressing methane emissions and flaring, for example. NOCs will become increasingly important as acquirers of these assets.
Operators in jurisdictions that have implemented windfall taxes will need to revisit future capital growth and expansion plans. As a result, we expect deal flow may shift toward jurisdictions that maintain a more stable fiscal regime in hydrocarbons.
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Power and utilities
Large utilities are shifting toward explicit portfolio optimisation and rationalisation strategies, mainly evidenced through a move to shed non-core assets to improve balance sheets and reposition capital to energy security, decarbonisation and energy transition-aligned themes.
Electrification of the energy system will likely continue to drive value creation opportunities for utilities across multiple dimensions:
- behind-the-meter/fence on-site generation coupled with storage and the ability to integrate additional electron-based assets (for example, heat pumps)
- investment in solutions that enable the decarbonisation of heating—including e-boilers and heat pumps—as well as district heating and industrial residual heat solutions
- increased investment in electric vehicle charging infrastructure
- divestment of gas transmission and distribution assets to avoid potential stranded assets
- new investors in gas infrastructure looking for hydrogen opportunities, especially midstream (such as hydrogen vending for heavy goods vehicles)
- investment in transmission or distribution grid operators, given the increasing complexity and scale of those systems
- digital solutions and technology capabilities that maximise utilisation and minimise grid congestion to allow for better use of existing infrastructure
- relocation of renewables supply chains into Europe and the US, mostly from Asia.
As IOCs and NOCs with diversification strategies seek to deliver on their renewables-generation capacity targets, we expect them to make more acquisitions of, or investments in, solar and wind projects.
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Chemicals
Chemicals M&A activity is expected to continue at a more muted pace in early 2023 as fears of a global economic slowdown weigh on markets. Rising financing costs, inflation, volatility in energy prices and disruption to feedstock supply will create a more challenging M&A environment for chemical companies, particularly over the winter months in Europe, as high energy costs and natural gas shortages put significant pressure on both margins and the ability of some companies to keep plants operating. Despite near-term M&A headwinds, the potential remains for a new wave in chemicals M&A activity in the second half of 2023.
Several underlying themes are expected to continue to shape the chemicals sector and M&A activity in 2023:
- A focus on carbon reduction and circularity to meet sustainability and ESG requirements continues. The speed at which companies can make objective M&A decisions and strategically manage portfolios will determine their advantage in this rapidly changing business environment.
- Proactive portfolio management is key to value creation. A new PwC study on divestitures found that companies that engage in active portfolio management generate the highest excess returns over industry peers. Recent trends have shown this is especially true in the chemicals sector as companies have begun to undertake significant portfolio transformation with a focus on investments in assets with higher growth, higher margins and lower cyclicality.
- Supply chain resilience will remain a focus as disruption in both trade flows and production in certain regions is likely to continue, creating an additional impetus for M&A for the remainder of the year.
- Moderating valuations and available capital will provide attractive M&A targets, particularly for companies with strengthened balance sheets.
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Energy, utilities and resources M&A 2023 outlook
Security of materials supply is paramount to successfully protecting or creating value in this era of geopolitical instability and energy transition. Business leaders who undertake near-term portfolio optimisation actions, such as transacting to add upstream materials suppliers to their asset portfolios, thereby securing volumes, improving certainty on price and gaining direct oversight of the ESG provenance of their products, will be well placed to achieve long-term sustained outcomes for their businesses and their stakeholders.
About the data
We have based our commentary on M&A trends on data provided by industry-recognised sources. Specifically, values and volumes referenced in this publication are based on officially announced transactions, excluding rumoured and withdrawn transactions, as provided by Refinitiv as of 31 December 2022 and as accessed on 2 January 2023. This has been supplemented by additional information from Dealogic and our independent research, and it includes data derived from data provided under license by Dealogic. Dealogic retains and reserves all rights in such licensed data. Certain adjustments have been made to the source information to align with PwC’s industry mapping.
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Partner, Energy, Utilities and Resources UK Leader of Industry, PwC United Kingdom
