Clare Munro, energy and infrastructure partner and expert in oil and gas at Brodies LLP, discusses the energy market.
It’s been a rollercoaster of a year for the energy market, but even the challenges of a global pandemic can’t suppress activity indefinitely, as demonstrated by deals activity in both oil & gas and renewables.
Last year started well for exploration and production (E&P) mergers and acquisition (M&A) activity on the UK Continental Shelf (UKCS), with multiple sales announced or ongoing, several companies reportedly eyeing IPOs, and the announcement in early January of Premier’s acquisition of both BP’s Andrew and Shearwater assets for £475 million and an increased stake in the Tolmount field from Dana for £190 million.
But then came COVID-19.
Virtually all deal processes stalled or failed (including the two Premier deals mentioned above) as the oil price collapsed and confidence in the sector nose-dived, and operators concentrated on the herculean task of keeping offshore operations (and onshore support) running safely.
By late summer the oil price rose and stabilised – but public sentiment, increased awareness of corporate environmental, social and governance requirements and government support for a ‘green recovery’ left many wondering about the sector’s future.
Even in the greenest of recoveries though, oil and gas remains vital for an orderly energy transition, and there are still those who see opportunities in the sector.
In the latter half of 2020, some M&A activity did resume and a few interesting E&P deals took place – NEO (Hitecvision) completed the acquisition of a parcel of assets from Total, and is now in exclusive negotiations for Exxonmobil’s package of 15 UKCS assets.
Chrysaor and Premier announced their merger – a deal which has a number of tangible benefits for both entities, and will create the largest listed independent E&P player on the UKCS – Harbour Energy – when it completes.
So what can we expect in 2021? In December, Centrica confirmed ongoing discussions with several parties about the sale of its 69% interest in Spirit Energy, having paused the sales process in April 2020.
Recent reports confirm that KNOC has commenced a sales process for part of its UKCS portfolio and its entire operations in the Netherlands and Denmark.
Other sales processes are also expected to revive in due course.
To get over the line, deals will either have to demonstrate tangible benefits or synergies (such as the Premier – Chrysaor deal), have sufficient attractive assets, and/or be carefully structured to cover value gaps (taking into account decommissioning liability and commodity price fluctuations).
Looking to service sector M&A activity, there remains potential for market consolidation, but deal flow is likely to remain sporadic – not least because of current difficulties in pricing and financing deals.
Generally the field of private equity backers has narrowed – generalist mid-market private equity is less interested, and some of the specialist energy funds are repositioning and refocusing on green energy – so the trend is likely to reflect a continued shift in sales to trade.
The wider energy market saw an exciting development in 2020; the start of unsubsidised deployment in onshore wind and solar, where such projects previously depended on government subsidies.
Buyers and sellers collaborated on new deal structures to support investment in new assets and the transfer of those assets into new long-term ownership.
With the return of onshore and solar to CfD (Contracts for Difference) auctions later this year, the market is likely to fund both subsidised and unsubsidised projects in 2021 and beyond.
Competition for CfDs will be fierce and some projects may decide they can create more value by taking the merchant route – selling their power to the market to maximise prices, rather than to achieve price certainty over the long term.
The development of a mixed market – subsidised and unsubsidised – should speed up investment in renewables, taking the UK closer to achieving its climate change policy goals.
Throughout our firm’s 10-year presence in Aberdeen, we’ve supported our clients through the challenges created by different oil price cycles – but it’s fair to say there’s never been a year quite like 2020.
Looking forward, there remain significant challenges but also opportunities, particularly for the north-east, and collaboration will play an important role in delivering the latter.
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