Strategic energy transition and security of supply investment opportunities are dominating the capital flows in the energy, utilities and resources (EU&R) market, and we expect this trend to continue for the remainder of 2023 and into 2024. As the investor pool continues to broaden and deepen, those investors are directing larger volumes of capital into merger and acquisition (M&A) opportunities and into greenfield and brownfield projects.
Companies globally, across all sectors, are being driven to transform—and, in some cases, completely reinvent—their business models due to decarbonisation, digitalisation, changing consumer behaviours, and a less stable geopolitical landscape. The EU&R sector, in particular, is benefiting from these broader trends, and consequently, we are seeing an influx of capital as companies and investors seek to execute on their transformation and reinvention objectives.
The challenge for all businesses during this transformative period is how to find the right balance between delivering near-term shareholder value and building the resilience and agility needed to thrive in an advanced-technology, low/no-carbon environment that is focused on environmental, social and governance (ESG) topics.
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‘Globally, businesses continue to pursue strategic energy transition objectives. As a result, the energy, utility and resources sector is attracting significant investment capital from a broad investor base to execute M&A and projects that help achieve those objectives.’
Mining and metals
Security of supply remains the primary driving factor for M&A activity in the mining and metals industry, and we expect this to continue in the medium term.
Miners are looking to maintain competitive positions and rebalance their portfolios of assets through geographic and commodity diversification. Glencore’s proposed acquisition of Teck, as well as Vale’s plans to separate its Energy Transition Materials business into its own legal entity and sell a 10% stake in the unit, are recent examples of deals that seek to unlock value related to critical minerals from portfolios and that are also large and transformational in nature.
Gold miners show no signs of slowing their dealmaking, as seen with Newmont’s recent bid to acquire Newcrest. As gold miners navigate a complex and changing market, M&A still offers a means of building scale, optimising portfolios, and unlocking synergies.
Stakeholder expectations on sustainability are shaping the critical minerals segment as buyers across all industry sectors look to demonstrate responsible sourcing. For miners, finding the right value chain partners is strategically important, whether through partnerships, acquisitions or consolidation. We also expect OEMs, sovereign wealth funds and pension funds to show increased interest in direct critical minerals investments. PwC’s Mine 2023 report discusses how miners now face an intensely competitive environment for critical minerals assets. As opportunities dwindle, it is increasingly urgent for mining leaders to acquire the assets that are needed to power their companies’ future growth.
Moving forward, we expect M&A processes to take longer, with increased scrutiny from investors, governments and other stakeholders.
Read our key trends for the oil and gas, power and utilities, and chemicals sectors.
Oil and gas
Commodity volatility, inflation, interest rates, and geopolitics are affecting valuations and debt availability and will continue to create challenges for oil and gas M&A over the short term. However, many producers have gained significant financial strength in recent years due to high commodity prices, resulting in lower leverage, large cash pools and improved cash flows. All of these attributes have historically led to higher levels of M&A.
We expect continued upstream consolidation as oil majors and independents focus on core strategic assets to maximize returns and shareholder value from high energy prices over the medium term. In the near term, M&A strategies will continue to include disposing of minority interests and non-core assets, acquiring assets strategic to ESG improvement, and optimising portfolios through operational and digital improvements—all steps along a path to net zero emissions.
The cyclical nature of oil and gas, combined with the transition towards clean energy, means companies need to balance their M&A activity in a way that allows them to take advantage of high energy prices up until oil demand peaks in a few years from now—while providing durability and elasticity as demand for oil and gas products slowly reduces over time. Trading, marketing, and retail and convenience businesses will provide an important bridge between legacy hydrocarbon and future low-carbon portfolios.
Read our key trends for the mining and metals, power and utilities, and chemicals sectors.
Power and utilities
M&A activity in power and utilities is likely to remain subdued over the remainder of 2023, with large utilities continuing to focus efforts on refurbishing existing assets to achieve superior returns on capital and on investing in new energy platforms to reposition their businesses towards energy security, decarbonisation, and energy transition–aligned themes.
We expect greater focus on portfolio optimisation and rationalisation strategies, as shown by ongoing moves by power and utilities companies to improve balance sheets and reinvest capital into key strategic priorities.
The US Inflation Reduction Act (IRA) is a lever power and utilities companies can pull to speed up the pace of the cleaner energy transition. Companies are looking to effectively use the credits and incentives offered under the IRA to offset investments they’re making to achieve net zero or to fund other decarbonisation efforts, such as building new renewable projects or exploring the adoption of new, clean energy sources, such as hydrogen. The ripple effect may be far-reaching, with greater investment ultimately expected to lead to further M&A in the longer term.
In the US and Europe, more than 100 gigawatts’ worth of intermittent energy projects are underway this year, along with a number of new projects exploring energy storage and new energy platforms, such as utility-scale transport of hydrogen. While these types of investments are expected to continue, M&A will likely stay relatively quiet through the remainder of 2023 because of continued regulatory and consumer uncertainty. However, we expect that the high interest-rate environment may lead to restructuring and the potential for distressed M&A, with market conditions favouring larger utilities (with relatively clean balance sheets) that will be well positioned to acquire more levered or financially constrained competitors.
Read our key trends for the mining and metals, oil and gas, and chemicals sectors.
Chemicals
Going into 2023, we expected a recovery in chemicals markets and related M&A activity as China’s COVID-19 restrictions eased and supply chains started returning to normal. However, weaker downstream demand, higher financing costs, and inflation impacts have put pressure on valuations, which the market is digesting. A bright spot for M&A in the first half of 2023 was a number of multibillion dollar cross-border deals, sponsored by US private equity funds and Middle Eastern petrochemical giants. M&A activity in other regions remains below 2022 levels. This is particularly evident in the European markets that also faced margin pressure from significant increases in domestic feedstocks following the start of the war in Ukraine in early 2022.
We remain cautiously optimistic for improved deal activity in the second half of 2023. Once the current uncertainty eases, divestitures of non-core assets from portfolio optimisation, surety of supply chain, and increasing pressure on companies to decarbonise and fulfill their sustainability objectives remain fundamental themes and M&A drivers within the chemicals sector in both the short and medium term.
An increasing number of private equity held investments are also at or approaching the end of their investment cycle, which could result in more assets coming to market beginning in the second half of the year.
Read our key trends for the mining and metals, oil and gas, and power and utilities, sectors.
2023 mid-year M&A outlook for energy, utilities & resources
As lifestyles change to embrace a lower-carbon, ESG-focused, advanced-tech future, EU&R businesses and investors must adapt and position themselves for a world of transition. Companies will need to be resilient and agile as they look to adjust their materials supply chains and overall value chains. Those that act early and decisively to transform or reinvent their business models, including through M&A, will be well placed to create value and deliver sustained outcomes.
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Partner, Energy, Utilities and Resources UK Leader of Industry, PwC United Kingdom
