For all the headwinds faced and the challenges caused by Covid, COP26 and Cambo, 2021 was actually a reasonable year for energy sector mergers and acquisitions (M&A).
Not for us the heady days enjoyed by many investors and corporate finance professionals emerging from lockdown in other sectors, where stories abound of advisers turning away or refusing to pitch for work.
There are also tales of double-digit multiples being paid for fairly unspectacular businesses, fuelled by considerable general private equity capital anxiously looking for a home.
Instead, it was a year of steady resumption in energy sector deal activity.
There is a new show in town as Cop26 moves into the rear-view mirror.”
Piper Sandler completed 12 transactions in 2021 from our Aberdeen and London offices.
One-third of those transactions were offshore wind related – a recognition of the changing landscape in energy service M&A.
But we retained an active pipeline of oil and gas service deals as the industry demonstrated its resilience, keeping the lights on and powering our homes and hospitals when others worked from home.
That resilience – assisted by steadily climbing commodity prices – led to a recovery in earnings for the service sector in 2021 which, in turn, created a more favourable climate for deal-making despite the anti-hydrocarbon rhetoric.
Moving into 2022 we see a similar pattern emerging.
But this time, while much of the rhetoric surrounding oil and gas remains the same, there is a new show in town as COP26 moves into the rear-view mirror.
This one has stark reality at its core as the public, press and even some politicians start to realise the consequences of rushing away from hydrocarbons – both economically and in terms of security of supply and national security.
The macro picture has a significant bearing on deal activity and, looking across the entire energy sector, 2022 is likely to be busy.
For several years, the focus has been on transition.
Operators and service companies have been seeking to boost their green credentials and demonstrate their relevance to new energy markets.
Renewables and especially offshore wind – the most mature of those markets – will continue to attract significant investor attention, underpinned by spectacular growth forecasts and some real capacity challenges.
Meanwhile in traditional energy, as commodity prices continue a steady climb towards $100 oil, operators have started to commit significant capital to new projects, in part to generate the capital they require to finance their clean energy ambitions.
As a result, service company backlogs seem more robust than they have been for a number of years.
All of this, of course, is set against an increasing demand for energy as the world recovers from two years of Covid restrictions.
This will bring about some major capacity challenges to deliver that energy supply.
Under-investment
Since the downturn at the end of 2014, hammered by volume and rate reductions from its customer base, the service sector has under-invested in equipment and people.
Allied to that, to some extent, the offshore wind and traditional oil and gas markets are competing in the same labour pools.
As activity rises in both parts of the energy sector there is an increasing likelihood of a supply crunch.
Cost inflation seems inevitable and we are already seeing signs of improvement in service sector earnings.
From an M&A perspective, we would normally expect that recovery to fuel activity in the sector.
Yet optimism is tempered by the continuing negative sentiment against oil and gas.
In the short term, challenges in selling pure oil and gas-related businesses will remain.
But we would expect to see some activity as capacity-constrained trade acquirers seek to consolidate in order to gain access to additional resources and earnings.
Middle Eastern investors and family offices who don’t need to appease activist shareholders are likely to remain attracted by the combination of relatively low multiples and growing profitability.
In due course, we expect the emergence of some contrarian investors who see opportunities in energy – both now and in the medium and long-term futures.
Changing perspective
At this stage it remains difficult to attract generalist private equity, but even here the conversation has shifted this year.
Last year, with Cop26 and Cambo making headlines, questions were centred on whether the sector and, therefore, individual businesses would exist meaningfully in five years’ time.
Now, there is a recognition not only they will but that they will also enjoy strong financial performance in that period.
But there remains a concern for financial buyers in their ability to re-sell in five years’ time.
As companies deliver earnings growth and the reality of the continuing vital role of oil and gas in the energy transition – well beyond the next decade – starts to be understood in investment committee rooms in London, it seems inevitable contrarians will be found even among generalist private equity.
While deal-making in the oil and gas sector today remains tough, if you combine this macro view with the incredible growth that is forecast in offshore wind and continuing investment in other renewable energy sources, there is more than a little cause for optimism.
Nick Dalgarno is the Aberdeen-based head of the eastern hemisphere energy and power corporate finance team at investment bank Piper Sandler.