Energy, Resources & Industrials and the Energy Transition: A Q2 M&A Outlook

Activity and investment appetite in the Energy, Resources & Industrials (ER&I) sectors continues to be strong with further confidence building in the Energy Transition investment opportunity. Here is our M&A outlook for Q2 2023 and beyond.

Energy Transition has become a fundamental component to M&A strategies and new Energy Transition funds are emerging at an unprecedented rate, adding to the investor landscape. We expect to see further increased competition for assets and businesses which display relevant Energy Transition credentials, with energy and industrial corporates competing directly with infrastructure funds and private equity for the same assets.

We’re also seeing smaller M&A deals that offer a platform for growth being hotly competed for as investors look to build exposure to Energy Transition trends, in particular where strong revenue pipelines and growth prospects are supported by experienced management teams.

The European renewables market is seeing increasing support from EU proposals to reduce reliance on Russian energy supply (RePowerEU) and planned legislation and fiscal packages to support achieving a 55% reduction in EU emissions by 2030 (Fit for 55). We anticipate further activity to come from the US, poised to expand its renewables market in areas like offshore wind. The US Government stimulus of c.$400bn federal clean energy funding and tax incentives announced in August 2022 under the Inflation Reduction Act, has seen international investors focus again on the US as the primary renewables market.

While volatility in energy and commodity prices continues, we expect to see the impact of decreasing prices, increased levels of windfall taxes and other regulatory pressures on wider ER&I businesses. The use of “penalties” rather than “incentives” has been seen by some in the industry to have diverted cash away from UK based energy projects. In addition, the long lead times for grid connections in the UK poses further risks to the development of renewable energy projects.

We also expect to see the effects of mounting societal and activist investor pressures on companies to decarbonise and revolutionise energy systems. We are set to experience a once-in-a-generation level of innovation in the global energy system with corresponding levels of M&A activity. The need to make supply chains more sustainable will see activity increase across all corporates as they adapt to new business models. Opportunities with a clear ESG and decarbonisation focus are already attracting high multiples.

Notwithstanding, there will be a fundamental requirement for a mix of new and existing energy sources as the phrase ‘Energy Transition’ inherently implies. With stubbornly high oil and gas prices, there is still value and deal activity in the UK North Sea upstream sector with IOCs selling non-core and late life assets to smaller, leaner, and more efficient operations. This will continue as others look to create value by extending production lives and developing carbon capture & storage opportunities.

There has also been a surge in activity around Energy Transition metals. This is attracting investment from mining companies and industrial corporates looking to secure raw materials for operations (e.g., lithium for vehicle manufacturers).

To achieve decarbonisation and net zero ambitions, governments, and policy makers will need to work with industry to create a stable environment that inspires confidence for long term investment. Getting the balance between regulation, taxes and incentives is a hugely complex challenge for policy makers and we are seeing differing global approaches emerging. As the landscape evolves, we expect M&A to continue at pace in this sector as investor strategies develop.

Please contact a member of our team and find out how we can help you discuss your organisation's 2023 M&A agenda.