M&A trends in energy, utilities, and resources: 2023 mid-year update

Since the beginning of 2022, the energy, utilities, and resources (EU&R) sectors have faced major challenges. Energy security, renewable energy sources and access to critical minerals have moved into the spotlight of both investors and society – not least because of the recent tensions between the US and China. Although the sectors’ M&A activity declined throughout 2022, we believe that energy transition and supply chain security will remain key priorities for companies and investors in 2023 and beyond. This will drive firms and PE houses to allocate capital to M&A and will foster other capital project development activities in the EU&R sectors. As the number and diversity of investors grow, there’s a noticeable uptick in funds channelled towards merger and acquisition ventures, both greenfield and brownfield projects.

Decarbonisation, digital shifts, changing consumer behaviours, and geopolitical changes are prompting companies worldwide to modify, or in some cases, overhaul their business structures. This requires significant agility. These overarching changes are positively impacting the EU&R sector, leading to increased capital input as businesses and investors strive for transformation. The ongoing challenge for businesses is striking a balance between immediate shareholder returns and resilience for a future which will be centred on advanced technology, minimal to zero carbon emissions, and environmental, social, and governance (ESG) considerations.

While the new interest rate environment has made financing more expensive globally and economic uncertainty persists, many EU&R businesses have strong balance sheets, bolstered by high commodity prices. Furthermore, the US Inflation Reduction Act (IRA) of 2022 – the most sweeping legislative action the US has ever taken to combat climate change – is driving significant investment capital towards renewables and away from other sectors. 

Key issues driving M&A activity in energy, utilities, and resources

A look at the various segments within the energy, utilities, and resources sectors reveals a focus on securing the supply chain and meeting carbon reduction targets:

Mining and metals  

Supply security is the main driver for mergers and acquisitions (M&A) in the mining and metals sector. We expect this trend to continue in the near future. Miners aim to diversify and maintain competition, as seen in Glencore’s proposed Teck acquisition and Vale’s restructuring plans. Gold miners continue their active dealmaking to optimise and grow, evidenced by Newmont’s bid for Newcrest. Sustainability is becoming vital in sourcing critical minerals, pushing miners to find the right partners, with increasing interest from entities such as OEMs and pension funds. PwC’s Mine 2023 report highlights an intense competition for these assets. As M&A opportunities become scarcer, there will be heightened scrutiny from stakeholders, including governments, which will prolong the processes. 

Oil and gas  

Factors like commodity volatility, inflation, and geopolitics will impact oil and gas M&A in the short term. Despite this, high commodity prices have bolstered many producers’ financials, which has led to higher M&A activity in the past. Upcoming consolidations will focus on strategic assets to enhance returns. M&A plans will involve selling non-core assets, acquiring assets aiding ESG goals, and optimising by means of digital measures towards zero emissions. As the sector faces cyclical challenges and a move towards clean energy, firms must manage their M&A to capitalise on high energy prices and adjust as oil demand eventually declines. Trading and retail businesses will bridge the gap between legacy and future low-carbon portfolios

Chemicals

At the beginning of 2023, we anticipated a boost in chemical markets M&A activity due to easing COVID-19 restrictions in China and stabilising supply chains. However, challenges like reduced demand, inflation, and high financing costs have affected market valuations. Notably, the first half of 2023 saw major cross-border deals involving US private equity and Middle Eastern petrochemical entities, while other regions, especially Europe, lagged behind 2022 levels, impacted by the Ukraine war. We keep measured hope for better M&A activity later in 2023. Key M&A motivators in the chemicals sector include divestment of non-core assets, supply chain assurance, and sustainability pushes. Additionally, many private equity investments are nearing their cycle end, which may bring more assets to the market in the coming months.

Power and utilities 

We expect M&A activity in the power and utilities sector to be modest for the remainder of 2023. Large utilities are prioritising asset renovation to improve capital returns and are shifting towards energy security and decarbonisation. Corporates are focusing on portfolio improvement and directing capital to strategic areas. The US Inflation Reduction Act (IRA) is helping companies accelerate the transition to clean energy by providing credits for decarbonisation efforts, which may stimulate long-term M&A. More than 100 gigawatts of intermittent energy projects are underway in the United States and Europe, including innovations in energy storage and hydrogen transportation. Despite these investments, M&A activity may remain limited this year due to regulatory and consumer uncertainty. However, a high interest rate environment could lead to distressed M&A, favouring large utilities willing to acquire financially distressed competitors.

2023 mid-year M&A outlook for energy, utilities, and resources

Geopolitical instability and the energy transition call for increased commodity and energy supply security in order to successfully protect and create value. As society shifts towards a more sustainable, ESG-centric, and advanced-tech future, EU&R enterprises and investors need to evolve and prepare for this changing landscape. Firms must be adaptable and robust in reconfiguring their supply and value chains. Companies that proactively and effectively develop or innovate their business strategies, also using M&A as a transformation tool, will be in a favourable position to achieve long-term and sustainable results.

In Switzerland, the energy, utilities, and resources sector reflects similar trends to those seen globally. The landscape is characterised by various smaller transactions, undertaken to either align or transform business models to better suit the market dynamics.

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