As part of its Global Transactions Forecast Report series, global law firm Baker McKenzie has released a report looking at mergers and acquisitions (M&A) and initial public offering (IPO) deal trends in the global energy sector.
The global energy sector had a stagnant year for M&A, with energy activity dropping slightly from a peak in 2017 of USD 306 billion to USD 255 billion in 2018. This highlights that rebounding oil prices, sanctions and regulatory pressures are impacting transactions across the energy industries of oil and gas and renewables.
Baker McKenzie’s Global Transactions Forecast, in association with Oxford Economics, predicts a further decrease in energy M&A in the next two years, dropping to USD 171 billion in 2019.
The world economy is cooling as well, however, the report predicts overall M&A values to creep back up in 2020, before stabilising in 2021.
Chair of Baker McKenzie’s Global Energy, Mining and Infrastructure Group, José A. Morán, believes that global demand for energy and its impact on commodities prices, combined with government policies and intervention, will likely drive M&A and IPO activity in the coming year.
“Even with a decrease of investor interest in IPOs, the O&G sector will still likely draw money from private equity firms, infrastructure funds and hedge funds,” he said.
The IPO value in energy mirrored M&A with a slight drop in 2018 to USD 8 billion, compared to USD 10 billion in 2017.
Adam Farlow, Partner and Head of Capital Markets, Europe, Middle East & Africa, commented: “Globally, we are expecting to see only a slight drop in Energy-related IPOs in 2019, before increasing again in 2020 – but this remains counter to the overall strong sentiment for IPOs expected this year.”
Renewed interest in renewables
The report states that the renewables subsector will likely experience increases in M&A and IPO activity as the energy industry rebalances investments in favour of renewables. Driving transactions in this space will be technology advances in electric vehicles, batteries, digitalisation, renewables and policy changes around sustainability, climate change and disclosure, sustainable lending, subsidy-free renewables.
“As the world’s energy mix transitions to electricity, electric vehicles and batteries proliferate, and sustainability becomes a more critical focus, we expect to see more energy companies investing in the renewable space to generate new lines of business or to build organic growth in renewables,” Mr Morán said.
The majority of the Fortune 100 companies have now set renewable energy targets, and many have joined the RE100 – a group of 140 businesses committed to sourcing 100 per cent of their electricity from renewables.
“The role of the corporate is key. Expect to see corporates, especially, large multi-nationals that have these global targets be drivers for new investments in renewables as they look to meet those targets and structure corporate power purchase agreements in a range of countries,” added Paul Curnow, Partner and Head of Renewable Energy and Clean Technology practice, Asia Pacific.
According to Mr Farlow, oil and gas independents are expected to continue to fail to feature in the IPO market. However, based on Baker McKenzie’s own research and discussions with market participants, a strong IPO market for renewables is expected, particularly in EMEA.
Capital is expected to continue to flow into the renewables sector, not only from incumbent operators, but also in the IPO market, given the continuing demand for renewable energy by customers, growing political pressure, and improving technology.
However, even outside the pure-play renewable energy space, the firm expects several private operators will come to market to fund their growth, particularly into new geographic markets.
Furthermore, the findings indicate that high levels of activity in energy are expected in the years ahead in developing economies, especially those in Asia, due to the increasing energy demand of their populations.
China, for instance, is predicted to lead the market in renewable growth with the country expected to add nearly 590 Gigawatts of renewables capacity by 2028.
“If you look at the global figures, Asia Pacific always leads the charge in terms of new installed megawatts of renewables and investment. Both China and India have opened the energy markets through reforms that should allow more opportunities for foreign investors, particularly, out of Europe,” Mr Curnow detailed.
Sanctions on Iran and Venezuela will likely negatively impact oil and gas supply and deal activity in the year ahead.
Other regulatory pressures include tax impacts, antitrust and employment concerns stemming from the investigation of no-poach agreements by the US and a number of other countries in Europe and Asia Pacific, and an increasing number of rules requiring companies to disclose the nature of their exposure to climate change.
The United States will also likely have a significant amount of energy activity due to its increasing production of crude oil and LNG export capacity – which some predict will double by the end of 2019.