Global M&A Trends in Energy, Utilities & Resources

The energy transition continues to be a primary driving factor for M&A activity in the mining and metals industry, and we expect this to continue in the medium term. Miners are looking to maintain and grow competitive positions and rebalance their portfolios as demand for critical minerals grows. Security of supply and building local supply chains is also a major focus in critical mineral M&A, with supply chain participants becoming more concerned about future supply of critical minerals, leading to trends related to minority investments, joint ventures and partnerships to help share investment risk and secure offtake. Government regulations, which are closely linked to geopolitical risk, will also be a major driver of critical mineral deal activity.

There are some short-term headwinds, including declines in battery commodity prices driven by slower demand from China, current economic and geopolitical uncertainty and a challenging financing environment. We are also seeing some hesitancy in moving forward and completing deals. For those deals that do move forward, M&A processes will likely take longer, with increased scrutiny from investors, governments and other stakeholders.  

While critical mineral deal activity is not immune to the general market decline, the overall M&A outlook remains very positive. Battery minerals such as copper and lithium will continue to be highly sought after. We expect industrial players to increasingly pursue direct ownership or direct offtake arrangements with miners of critical minerals.

Gold miners are also continuing to engage in M&A as a means of building scale, optimising portfolios and unlocking synergies, and we expect to continue to see more consolidation, especially at the mid-tier level.

Commodity volatility, inflation, interest rates and geopolitics are affecting debt availability and will continue to create challenges for oil and gas M&A over the short term. However, many producers have gained significant financial strength in recent years, resulting in lower leverage, large cash pools and improved cash flows. These attributes have historically led to higher levels of M&A activity, and we expect this trend to play out further in 2024.

ESG-centric oil and gas dealmaking in North America has taken a back seat to portfolio optimisation and consolidation as oil majors and other larger producers look to improve their overall asset duration, drilling inventories and production economics. The higher valuations observed in recent North American transactions are expected to continue into 2024. The broad themes of upstream consolidation and portfolio optimisation are global, and we expect these themes to be prevalent in 2024 dealmaking.

Because of the cyclical nature of oil and gas, combined with the transition toward clean energy,  companies will need to balance their M&A activity in a way that allows them to capitalise on high energy prices while taking the necessary steps to transform their business models for the future.

Portfolio optimisation, consolidation and rationalisation strategies continue to be major drivers of M&A among large utilities as companies aim to improve their balance sheets in a sustained high-interest rate environment. Capital repositioning toward energy security continues, particularly in Europe, while in North America, the impact of the Inflation Reduction Act and Infrastructure Investment and Jobs Act continues to spur large utilities’ capital deployment decisions and is leading to strategic positioning by a surge of developers seeking project capital for greenfield projects aligned with the energy transition.

Decarbonisation continues to be a theme of major interest. Some policy uncertainty is creating regulatory headwinds and wariness by large utilities in making major investment commitments. Globally, although capital pools are growing, significant amounts of investment capital remain on the sidelines. 

For utilities, electrification will remain the dominant theme, and we expect it to manifest through continued investment in electric charging stations, electrification of heat, an increased focus on energy storage (particularly in increasingly intermittent power markets), customer-driven initiatives and an increased focus on digital solutions. Throughout 2023, international and national oil companies made multiple public statements about their intent to continue to strategically position themselves and deploy capital aligned with their diversification strategy objectives. We expect this will continue in 2024 and beyond. 

Investments in renewable power will continue, but we anticipate the higher cost of capital and cost inflation will create some headwinds. Although we expect to see sustained and pervasive deployment of solar energy across Europe and the world, we may also see a shift away from a focus on some wind development projects. This pivot away from wind is due to operational factors (such as struggling OEMs, slow grid connection and supply chain issues) and continued economic headwinds. We also expect the divestiture theme related to renewables monetisation by large oil and gas participants to continue in 2024.

Although the chemicals sector fell short of expectations in 2023 as a weaker economic outlook and a subdued COVID-19 recovery in China weighed on global demand, several market dynamics (inflation, feedstock volatility and interest rates) have shown signs of stabilising. These signs, together with forecast increases in production outputs in most major markets, are giving dealmakers reasons to be cautiously optimistic about M&A activity in the chemicals sector in 2024.

We see several factors influencing M&A activity in chemicals. Sustainability objectives will continue to shape the industry in many forms. On the demand side, the energy transition and technologies are linked to improved industrial production for several chemical markets. In addition, circular economy investments are needed to reduce waste and scope 2 and 3 emissions as government regulations and societal expectations prompt chemical companies to accelerate and prioritise their sustainability agendas. 

In the chemicals sector, competitive dynamics among regions will play out through the pursuit of M&A. European assets currently face higher feedstock, energy and carbon costs, while conflicts in Ukraine and the Middle East contribute to continued economic uncertainty. Markets such as in North America and the Middle East, which benefit from access to structurally cheaper feedstocks, may represent attractive investment opportunities. 

Government regulations present both opportunities and challenges, particularly in European carbon markets. In addition to the existing EU Emissions Trading System (ETS), the Green Deal and the Carbon Border Adjustment Mechanism (CBAM) were introduced in 2023 to stimulate investments focused on carbon neutrality and safeguard against carbon leakage. The CBAM will initially apply to imports of certain goods and selected precursors for which production is deemed to be carbon-intensive and at the most significant risk of carbon leakage, including cement, iron and steel, aluminium, fertilisers, electricity, and hydrogen. Phasing in CBAM and similar shifts in policy that are starting to emerge in other regions will be an important consideration for dealmakers when assessing value.