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The energy sector in M&A deals - 2013 and beyond

29/11/2013

Looking at the number of merger & acquisition (M&A) transactions as an indicator of the global economy is certainly one good way of taking the temperature of the current economic climate. The M&A sector effectively shows where business and investor confidence lies, indicating the flow of capital between successful markets and geographical regions and to some degree predicts how this flow will shift in the future. The same is true of the energy sector, and 2013 has been an interesting year for those of us who have been actively tracking the market.

M&A deals in general have been trending downwards ever since the second half of 2010, yet the energy sector has been robustly fighting off this decline, nearly topping the M&A markets in terms of transactional value for the past four years. 2012 was a record year also for the sector, with the €36.6bn Glencore takeover of Xstrata the biggest deal across all industries in the entire year. But what impact did this have on 2013?

The Energy sector hasn’t reached the heights of 2012 since and therefore, at a glance, it appears that the sector may have fallen by the wayside and lost its chart-topping mantle of previous years. However a deeper look into the total value of M&A deals in 2013 also shows a clear downward trend – a fact that reflects the massive impact the Glencore/Xstrata merger had on the global market. With this in mind, would it be true to state that the energy sector remains strong? Yes, but it must be noted that this strength is not spread evenly. Regions associated with classic fossil fuel production (with the exception of North America) and the conventional methods of their processing are not faring particularly well in an industry sector caught between the need to modernise and improve its environmental credentials while still providing millions with energy.

As a result, emerging markets are where the growth is currently to be found. Turkey, Latin America, Asia-Pacific and Africa are all areas experiencing a surge in deals and takeovers in the sector and, almost to be expected, Chinese companies are forging ahead in this respect. This is also reflective of confidence, despite wariness elsewhere caused by unstable politics associated with fracking and low confidence in the shale gas revolution, which is certainly the case at least in Europe. This lack of confidence is another reason why the emerging markets are set to be the leaders in growth. Europe’s debt crisis is something which still looms large in the minds of many heads of companies and investors, holding the M&A market back from finally shrugging of the shackles of the global financial crisis.

The sentiment on shale gas brings us onto the second area of potential growth, and where the industry is likely to continue develop into 2014 – alternative energy sources and fossil fuel processing methods. The majority of industry insiders and experts believe that this is where the growth – and they do believe there will be growth in 2014, not decline – is going to happen. This can be attributed to governmental support of green energy sources and continued investment in alternative methods of harnessing these sources. But this is also due to increasing costs of running networks for existing power generation and supply businesses that mainly rely on existing infrastructure and standard energy production methods. The cost of upkeep and maintenance is ever-growing, reducing the free capital and hampering the drive to finance new deals, hence the M&A growth predicted elsewhere.

A slowly growing sense of financial stability on the horizon is tempting many to unlock capital that has previously been held back during the turbulent years since 2008. This optimism is something we have been eagerly awaiting for years and it is good to see. Those in the energy industry should, if they haven’t already, begin to keep an eye on this development of the M&A market as it will highlight where the growth, and where the investment, is likely to be. With this knowledge, business leaders will surely be well placed to take advantage and reap the benefits of an industry emerging from a recession relatively unscathed.