At the beginning of 2022, the rising price of oil suggested that the new year might be a robust one for M&A activity. However, within a few short months, that promise faded and was replaced with an uncertain energy M&A landscape.
The Russian invasion of Ukraine in February sparked fluctuations in energy prices. Next, commodities costs spiked, coupled with a recession and the highest rate of inflation in 40 years. On top of this, growing pressures from a variety of Environmental, Social and Government (ESG) factors forced a fundamental rethinking of how acquisitions should be valuated, and how a company’s potential for future ROI should be forecast.
While the price of commodities and the situation in Ukraine could change rapidly, the pressures presented by ESG factors are likely to be long term. These factors include the politics of climate change and carbon-based energy; public pressure for companies and governments to diversify into green or renewable resources; and government policies which use incentives, penalties, and subsidies to reduce carbon emissions.
But even in this turbulent environment, there are still steps that companies in the energy sector can take to position themselves for future M&A success.
Four Areas That Will Shape Your Future Energy M&A Prospects
Rather than passively waiting for the market and global events to stabilize, companies can take proactive measures to better position themselves for the future. As market demands change and energy paradigms shift, O&G firms would be well served to give serious thought to four key areas:
1. Strategic Planning
In the past, M&A activity often involved companies expanding their core competencies by making choices that would enable them to grow their traditional lines of business. As the demand for non-carbon energy resources grows, future M&A decisions may be driven by factors such as portfolio diversification, ESG concerns, and accommodating a transition to non-carbon resources. Additionally, complementary competencies such as strengths in measuring carbon capture become more attractive. Key elements in a successful strategic plan include:
- Aligning prospective partners and deals with long-term goals
- Expanding into new energy sectors
- Prioritizing energy information services
- Placing a heavier consideration on ESG concerns
- Monitoring and assessing private equity activity in renewables.
2. Organizational Adaptability
In addition to reviewing their guiding strategy, companies should look at the organizational factors that will impact their success in a more active M&A environment. The past couple of years have changed the standard for what makes a company valuable to buyers. Businesses linked to a high rig count and new drilling activity, for example, are now viewed less favorably than their counterparts. As the markets continue to shift, organizations will need to position themselves for continuous evolution by:
- Examining their market segment focus
- Analyzing the existing project and sales backlog
- Evaluating customer concentration
- Reviewing contract terms and capital expenditures
- Reviewing key strengths and weakness in their management team
3. Field Process Improvement
By streamlining or enhancing processes, field efficiencies can be significantly improved. These efficiencies allow companies to move expenditures away from maintenance and overhead and shift more of their budget toward sustained and successful growth. This has the potential to not only drive performance and profitability, but also increase their leverage in an active M&A market – either as a buyer or a target for acquisition.
4. IT Infrastructure
The value of energy information systems has been demonstrated time and time again. Despite this, it’s widely accepted that IT expenditures are often the first to be cut and the last to return during downturns. In particular, investment should be made in technologies that:
- Support the streamlining of processes and lowering of overhead
- Address new and complex areas — such as evaluating carbon offsets or merging renewables into existing operations
- Improve efficiencies in field production
- Enable new algorithms and analytics for M&A valuations
2022 did not live up to its initial promise of robust activity. There are still some deals being made, but overall M&A activity in the last quarter is down nearly two-thirds year over year. For most companies, the best course of action may be to wait out the current uncertainties and better position themselves for when relative stability returns.
At Sendero, we help energy companies throughout the US gain the insights they need to form effective strategies, bring fundamental improvement to their processes, and implement the IT systems needed to support organizational change.
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