The Shifting Climate of Energy M&A

December 13, 2023 | Blog

The Shifting Climate of Energy M&A

As nations around the world take aim at a carbon-neutral future, the face of the energy industry is changing before our eyes. At the same time, geopolitical pressures and an ever-growing demand for electricity present obstacles to this global transition. What do these competing pressures mean for M&A within the energy industry? Our latest webinar, presented in partnership with PitchBook, tackles this question with help from dealmaking experts in both the traditional and emerging energy sectors.

Cleanup Opportunities in 2024

What will be the biggest driver of M&A in the energy industry in the coming year? Audience polling suggests that most viewers expect consolidation and divestiture in certain industries to be the preeminent factors. The panelists thought so too.

Austin Harbour, Managing Director, Energy & Power Investment Banking at Piper Sandler & Co., said that the predominant business model in the industry has shifted. There’s a greater focus on cash flow and ROI over rapid growth. At the same time, upstream players face resource and inventory constraints that are driving them to merge, incentivizing similar moves in the service and equipment industries.

Adam Hinckley, the VP of Corporate Development at Enphase Energy, also expects widespread consolidation in renewable and alternative energy. We’re living in the aftermath of the 2020-2021 rush to exit companies in that space through SPACs — and the discovery that many of them weren’t ready. As VCs pull back on renewables and share prices decline, buyers may have many chances to pick up distressed assets at a bargain.

Conflicting Trends Facing the Energy Transition

Moderator Elle Cathey, Datasite’s Senior Director of Product Marketing, asked the panel for their thoughts on the various headwinds and tailwinds facing renewable energy investment. On the one hand, the ongoing COP28 conference highlights the growing push to phase out fossil fuels. On the other, geopolitical instability, price fluctuations, and regulatory uncertainty make many investors nervous.

Hinckley was skeptical that we’re close to a large-scale transition. “Not to be a Debbie Downer, but oftentimes these large NGO-type events are a lot of talk, not a lot of action,” he said.

From an M&A perspective, he said, he expects traditional energy companies to be net sellers of renewable energy companies in 2024. Many players in the traditional sector underestimated the time frame needed to get new technology to the market and new infrastructure in place.

Harbour agreed and pointed out that the world is still running on infrastructure designed around crude oil and natural gas. Changing that will take time. His clients, he said, are less interested in reducing emissions and more interested in maximizing value in a world that still holds a significant amount of runway for oil and gas.

Alex Lykken, a PitchBook Senior Analyst, offered a slightly rosier picture. He shared data showing that even with the significant dropoff after the 2021 boom, climate and clean tech investment remains well above pre-pandemic levels.

“Considering that the worst post-Covid year is still above the best pre-Covid year that either sector has ever seen,” Lykken said, “I think it’s reflective of the broader technological changes within the sector.”


Storage May Be Poised For a Breakout

Discussing the likely investment hotspots within the energy industry, the panelists pointed to storage and smart grid solutions.

“Obviously there’s a ton of investment that goes into the assets around building out solar and wind farms,” Hinckley said. “But what everyone has come to realize is that those are intermittent sources of power, and increasing penetration of renewables requires efficient and cost-effective energy storage.”

Harbour seconded this assessment but suggested natural gas development as a close second. He noted that many investors who had previously signaled they wanted to leave fossil fuels behind had begun to walk that stance back over the past year.

Some of that change may be attributable to the shockwaves of the war in Ukraine. After seeing the human cost of drastic disruptions to power supplies, even ESG-minded investors may be taking a more conservative view of energy security.


How Does Energy M&A Operate in 2023 and Beyond?

Cathey asked the panelists why they think firms are spending more time on prep and diligence than in previous years — a trend that’s even more pronounced in the energy space than in other sectors.

Harbour pointed to the ongoing volatility in the market. Both interest rates and activity drivers have ebbed and flowed of late, making investors more cautious and increasing the duration of underwriting processes.

Another poll question asked the experts and the audience what’s most likely to make energy deals fall apart. Hinckley said it depends on the strength of the preexisting relationship between the parties. When there’s less history between them, questions about culture and strategic fit are more likely to derail a deal. When there’s a more established relationship, financial discrepancies are the biggest deal-killers.

“We’re typically buying early-stage companies that are forecasting massive hockey-stick growth in new sectors of energy,” he said. “As we’re getting monthly progress reports, if they’re failing to meet those metrics that they’ve forecasted, that’s going to be a big problem for us.”

Harbour agreed.

“Most of the deals we’ve had that haven’t gotten done have ultimately come down to a bid-ask spread that we couldn’t bridge,” he said. “One way to solve things is to tell the seller, to some degree, to put their money where their mouth is.”

He noted that we’ve suggested creative structures that enable sellers to earn into a higher valuation while “putting some of their money where their mouth is” including earn-outs, contingent value, or seller notes.


The Final Word

Cathey asked the panelists to sum up their thoughts on the discussion in one word. For Lykken, that word was “Dynamism”. For Harbour, it was “Consolidation.” And for Hinckley, it was “Distress” — specifically, the opportunity to be found in distressed assets.

Though dealmakers may be moving with more caution in recent years, both renewable and traditional energy should still see robust M&A activity in the months ahead. Savvy buyers may want to look out for energy storage, clean tech, and natural gas opportunities in particular, and be open to creative deal structures when valuation gaps emerge.

Interested in learning more?

Watch the full replay on-demand.

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