M&A trends in energy, utilities and resources: 2023 outlook

Few economic sectors have experienced as much turbulence as energy, utilities and resources (EU&R) in 2022. Amid heightened uncertainty, M&A activity declined throughout 2022, both in terms of value and volume. Nevertheless, we believe that energy transition and supply chain security – especially for energy, renewables, and critical minerals – will remain key priorities for investors in 2023. This will drive companies to allocate capital to M&A and other capital project development activities in the EU&R sectors.

The new interest rate environment has certainly made financing more expensive. At the same time, many EU&R businesses have stronger balance sheets than a year ago, bolstered by high commodity prices. We have also seen the emergence of alternative debt providers such as credit funds. These two factors have reduced management’s reliance on traditional bank debt to finance M&A. We also expect to see further convergence across the EU&R sectors. Last year, chemical businesses bought into renewables projects, oil and gas companies acquired electricity retailers, and automotive OEMs invested into critical minerals mining companies or directly secured their supply chains. Convergence is accelerating and will make EU&R dealmaking even more complex.

Not only the issues around critical minerals, but also other drivers will support M&A activity in EU&R. International oil companies (IOCs) shifting their focus towards biofuels are acquiring renewable sources of natural gas. IOCs will continue to restructure their upstream portfolios to meet carbon reduction targets, and national oil companies (NOCs) will benefit from the divestment of these assets. Investment across the e-mobility value chain will continue to surge as energy providers and utilities seek to create added value from battery components for charge point operators. Additional large investments will flow into digital technology solutions and (sharing) platforms related to energy generation and distribution.

Furthermore, there's the US Inflation Reduction Act (IRA) of 2022 – the most sweeping legislative action the US has ever taken to combat climate change. The IRA is a game-changer, and we expect it to lead to a shift in investment towards renewables and away from other sectors.

What drives M&A in energy, utilities and resources in 2023? 

A brief look at the different segments of the energy, utilities and resources sectors shows that supply chain security and carbon reduction targets are the overarching topics:

Mining and metals

Environmental criteria and supply chain resilience will continue to be the main drivers of M&A activity in this segment. Many players are shifting their portfolio focus from carbon-intensive assets to critical minerals. Battery minerals such as copper and lithium, for example, will remain in high demand. Geopolitical uncertainty and ongoing sanctions are causing miners to consider strategic partnership options, and we expect M&A activity to lead to a domestic consolidation of players as governments require producers to build local supply chains and reduce dependence on other (potentially unstable) countries.

Oil and gas

High and volatile commodity prices, the accelerated pace of energy transition, the impact of windfall taxes, and an uncertain geopolitical landscape are likely to lead to a challenging dealmaking environment. We expect to see mid-sized and smaller bolt-on deals that add new capabilities, rather than larger and transformational deals that carry greater risk. For IOCs and NOCs with diversification strategies in energy transition, we expect strong cash flows from hydrocarbons to fund low-carbon investment opportunities. As IOCs divest non-core hydrocarbon assets, we anticipate greater scrutiny of ESG credentials and divestment strategies.

Chemicals

M&A activity in chemicals is likely to be more muted in early 2023, as fears of a global economic slowdown, high energy costs, and natural gas shortages weigh on markets. But despite near-term M&A headwinds, there is potential for a new wave of M&A activity in the chemical industry in the second half of 2023. Chemicals focusing on carbon reduction and circular economy, companies looking to improve supply chain resilience, proactive portfolio management, as well as more moderate valuations and available capital will increase the number of attractive M&A targets – especially for companies with strong balance sheets.

Power and utilities

Large utilities are divesting non-core assets to improve their balance sheets and reallocate capital in favour of energy security and for issues related to the energy transition. In doing so, the electrification of the energy system is likely to provide further value creation opportunities for utilities: increased investment in electric vehicle charging infrastructure, divestment of gas transmission and distribution assets to avoid stranded assets, investment in grid operators, or digital capabilities to maximise usage and minimise grid congestion, to name a few. As IOCs and NOCs seek to meet their renewable energy targets, we expect them to increasingly acquire solar and wind projects.

What about M&A in the Swiss energy, utility, and resources sector?

Zooming in on Switzerland, we have been observing strong energy transition and sector convergence driven M&A activity. As an example, AMAG Group, the largest Swiss car importing and trading company, acquired from Bouygues E&S InTec Switzerland the business unit Helion, which specialises in photovoltaic systems, heat pumps, and e-mobility. This bold move is a showcase for the ongoing convergence of the mobility and the power sectors. Thanks to the acquisition, AMAG Group will be able to offer comprehensive all-in-one solutions that include not only electric vehicles, but also consulting, planning, installation, and maintenance of photovoltaic systems, power storage solutions, and charging stations as well as energy management services. Furthermore, as part of its energy transition efforts, Shell Switzerland acquired evpass, Switzerland’s largest network of charging stations for electric vehicles. This acquisition underlines the impact of EV growth on the business model of fuel retailers.

Axpo, the largest Swiss utility, is aiming to grow significantly in the renewables space, particularly in photovoltaic and wind, but also in hydrogen and energy storage. The market leader is also working on further growing its trading and PPA business and focusing on growth pockets in the Swiss market. Against the backdrop of this strategy, Axpo closed several deals in the last months, including the sale of its 5% interest in the Trans Adriatic Pipeline to Fluxys and Enagás and the 13% stake in Swiss utility Repower. Axpo aims to develop a total capacity of 10 GW in solar parks and 3 GW in wind energy plants by 2030.

Swiss energy and infrastructure company BKW, which has been the most active domestic buyer for years, reinforced its growth strategy and intends to increase its EBIT to over CHF 800 million by 2026 by a sustained growth in energy and services and the expansion of its renewables portfolio to over 1 GW. With the acquisition of six wind farms in France with an installed capacity of 106 MW in 2022, BKW took a significant step towards thus target. The company also intends to offer institutional investors the opportunity to acquire minority stakes in its renewable production facilities. The first transaction of this type was concluded in 2022 by enabling two Swiss pension funds to acquire a 49% interest in nine existing BKW wind farms in France, Italy, and Norway.

Against the backdrop of the ongoing energy transition, we expect Swiss power and utilities companies to pursue their M&A activity, which will be boosted by governmental green initiatives and robust power market prices. Transactions around solar PV, electric mobility, and hydrogen will be top M&A trends in the near future.

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