Out-Law Analysis 3 min. read
24 Feb 2021, 9:51 am
Major oil and gas companies are accelerating their move into renewables projects as part of their transition to a net-zero future in an ongoing trend which will lead to more transactional activity in the next 12 months and beyond.
Earlier in February BP and Total laid down markers signalling their intent to accelerate energy transition, when consortia led by the oil giants secured more than half of the 8GW of offshore wind project leases auctioned under the Crown Estate’s Offshore Wind Leasing Round 4.
In recent weeks Exxon has reinvigorated its process in relation to a material sale of its UK Continental Shelf assets, which is not a surprise given the pressure the company has come under at a corporate level to embrace energy transition.
The US majors have probably been slightly slower than their European contemporaries on this front, but with Exxon now also in discussions to support the Acorn Carbon Capture and Storage (CSS) project at Peterhead, this demonstrates the issue is very much a live one.
Total and Chevron have also been active in recent years, divesting portfolios of North Sea assets and this exit from non-core mature assets allows capital to be redeployed in other oil and gas geographies, typically less mature basins where they can meet their target investment criteria - or into energy transition assets, particularly offshore wind, solar, CCS and hydrogen.
This big push is undoubtedly driven by their institutional investors demanding a pivot which would have been unthinkable on this scale only a few years ago, but there is an interesting sub-plot to energy transition driven M&A: who is actually buying these non-core assets that are coming on to the market.
Smaller independents backed by private equity and commodity traders are to the fore, for example – including Viaro-backed RockRose and Hitec-backed NEO Energy – and this will continue to be a theme.
One interesting aspect is how the private equity funds who have invested in these assets are going to exit, when the typical investment lifecycle is five to seven years, and the time is coming for them to be looking to cash out. Traditionally, they would go to the markets, and while specialist energy funds are still interested in oil and gas, the appetite of generalist funds to invest in the sector has cooled given their greater sensitivity to environmental, social and governance investing.
There is some creativity being adopted as a result of this. A case in point is Chrysaor’s reverse takeover of Premier Oil (to be renamed Harbour Energy if the merger is approved). The tie-up ticks many boxes by addressing Premier's leverage issues, while providing access to the markets that Chrysaor had been looking for.
The last 12 months have proved to be particularly torrid for listed oil and gas companies, with most trading at a significant discount to their core net asset value (NAV). Most are now trading at much more modest discounts of 10-20% of NAV but with their share price very heavily influenced by oil price fluctuations, we will continue to see increased M&A activity in this space.
It is likely consolidation amongst smaller listed oil and gas companies will be another key theme throughout 2021. Geographic diversification, rebalancing of the asset mix within portfolios, and economies of scale will be the key drivers.
M&A activity will also benefit from a more realistic approach by sellers who now take the view that valuation gaps can be met because there is more short-term stability of Brent pricing and more of a consensus as to the longer-term price of oil.
There is also a much better understood path around how to bridge valuation gaps using a variety of contingent and deferred consideration structures, often linked to particular milestones or oil and gas prices. While in the past deals may have fallen over because consensus could not be reached on price, these tools are smoothing out that delta.
Another trend which has taken hold is the prevalence of commodity traders as equity investors and this is driving M&A. Viaro Energy acquiring RockRose is one example, while Mercuria has a substantial interest in Tailwind Energy, which has been and will continue to be acquisitive. While the sources of capital in the hydrocarbon sector have pivoted away from tradition in recent years, commodity traders are helping to fill that gap both on the equity and debt side.
In the oilfield services sector, M&A has been the preferred option for companies seeking to expand into new markets. They too have been quick to recognise the need to diversify away from oil and gas to keep up with the move into a zero-carbon landscape, so we expect significant activity in this sphere, with acquisitions concentrated on new technologies and companies that can boost diversification into the renewables supply chain.
The events of 2020 have accelerated the move to energy transition across all areas of the sector on a scale no one could have predicted. It will be the key driver for M&A activity in 2021 and will remain so for many years to come.
A version of this was originally published in the Press and Journal
15 Feb 2021
22 Feb 2019