What key themes should Energy & Resources dealmakers consider in 2023?

This year has seen exceptionally high and volatile energy and commodity prices, resulting in energy, power, and mining companies achieving record profits and cash flows. Strengthened balance sheets will likely lead to investment and an uptick in associated M&A activity. And the continuation of international oil companies’ (IOC) focus on renewable generation and the supply of power, as well as utility companies build-out of generation capacity and renewable energy systems, is set to accelerate.

However, investor confidence has been recently undermined by extensions and increases to the Energy Profits Levy and the introduction of the Electricity Generator Levy. Several industry participants have downscaled their UK investment plans in light of these windfall taxes.

Additionally, shareholder returns, some of which have yet to recover from Covid crisis cuts, may prove more pressing, especially in the face of shareholder activism. And we expect some investment focus to shift away from the UK, threatening the progress of the UK’s long-term energy security future.

The UK North Sea can remain an attractive investment opportunity, particularly for independents. The recent Ithaca IPO (the 5th largest European IPO of 2022) also suggests renewed public market appetite. This trend is likely to continue, especially while oil remains at levels around $90/bbl, although the appeal for “holding” assets remains while exceptional prices prevail.

Increased demand for energy transition metals such as lithium, copper, nickel, and cobalt will drive mining deals. At the same time, despite macroeconomic pressures, 2022’s high-price environment for these commodities will likely persist into next year.

The energy transition has attracted significant investment and global capital in 2022, thanks to much-improved confidence and enthusiasm, underpinned in part by international carbon commitments. This is leading many private equity and infrastructure investors to launch energy transition funds.

Regarding developing renewable energy projects, the UK and broader Europe lead the rest of the world. This has attracted investment in operational and development wind, solar and battery projects, and renewable portfolios, particularly from the Middle East and the Far East.

This is likely to accelerate the maturing of emerging technologies, including hydrogen, carbon capture, floating wind, battery storage and biofuels. Tepco’s recent investment in Flotation Energy is a testament to these as international investors look for a platform to grow market share.

Battery storage continues to appeal to investors as they take advantage of the volatility in power prices, increasing mix of renewable generation and, in some cases, look to secure power supply as part of a broader industrial supply chain.

However, complexities around balancing grid capacity and storage, along with the emergence of smaller-scale asset generation sources, will create pressure on electricity grid systems – threatening to slow the renewable power expansion in the UK.