The profitability of oil and gas versus the excitement for renewables is creating an interesting dynamic for investors across the energy industry.
That’s the verdict according to Naill Benzahia, corporate finance director at Hutcheon Mearns. Working on the buy and sell side of transactions for small, medium and large energy companies, he’s noticed a shift in investor appetite for oil and gas.
Naill explained: “Most oil and gas companies are performing very well financially, with strong underlying trading. The age profile of the assets in the UK mean they require significant maintenance to maximise economic recovery. This is fuelled further by the political agenda and focus on energy security.
“Albeit, it will be interesting to see how the impact of COP28 and the agreement to transition away from fossil fuels impacts real investment.
“All of this ultimately translates into M&A (mergers and acquisitions) activity. Generally trading has improved which means companies in this space are performing better than they have in the recent past. There is also a growing realisation that transition has to be just that. Without oil and gas we will render ourselves uneconomical in a transitional environment – we need hydrocarbons to develop and commission transitional technologies.
“Coming out of Covid, there were quite poor results all round. Now, these companies have a number of years of improving financial performance so it’s a good time to look at selling if the longer-term story is compelling enough. This is generating activity.
“There is an appetite again for oilfield services businesses, however valuations have tempered. Crucially, oil and gas- focused companies must exhibit an ability to transition or provide a platform upon which to build a business equipped to transition alongside its clients. Greenwashing, however, doesn’t work – it needs to be tangible.”
Meanwhile, demand remains strong for renewables.
Naill said: “Renewable companies are commanding higher valuations and more favourable structures due to buyer appetite. There have, however, been some headwinds in this space highlighted by the government’s Contracts for Difference (CfD) Allocation Round 5 (AR5) where no bids were made for new offshore wind farms. There are a lot of delays, too, and in some cases cancellations, like the Orsted Ocean Wind I and II projects in the US, as a result of rising costs in the offshore wind supply chain.
“Despite the challenges in the near term for offshore wind, the longer term macroeconomic drivers remain strong, hence the unwavering appetite from investors. This is reinforced by government policy, like the improved strike price for offshore wind in advance of Allocation Round 6 (AR6).”
Another increasingly important element is decarbonisation. Naill shared: “Many people now accept that oil and gas will be part of the energy mix for a prolonged period as the energy supply transitions, so a key theme is how to minimise the carbon footprint of this.”
New technologies and investment are needed to drive decarbonisation, says Naill, so businesses in this space can prove attractive to investors.
And of course, across the board, banking remains challenging but important for M&A. Naill explained: “The challenges aren’t specific to energy, it’s evident across multiple sectors given high interest rates and global economic challenges. But the banks are open, there’s a mixture of high street and alternative lenders or challenger banks offering debt solutions.
“Generally, banks are still quite averse to oil and gas. Renewables are a lot easier, the challenge is displaying steady cashflow generation over a prolonged period to underpin a funding package.”
All in all, the M&A landscape in the energy industry is dynamic and investor appetite is there, with Hutcheon Mearns working on driving forward deals for its clients.
Naill ended: “The level of public and private investment into the energy sector remains massive, which creates huge opportunity. There’s the cash to be generated by oil and gas, versus the excitement and drive towards renewables.”
Hutcheon Mearns’ 2023 Deal Highlights
- Advised energy services group on the sale of engineering and construction company to US private equity firm
- Sale of downhole technology group to US listed energy services company
- Sale of software technology business to European software vertical
- Supported energy services group on acquisition of fabrication specialists
- Supported energy services group on acquisition of US based wind blade repair business
- Supported international renewables group on the acquisition of subsea cable installation and maintenance business
- Supported UK PE on the investment into North American power industry products company
- Supported in the preparation of the long-term strategic forecast for international decommissioning business
- Lead adviser to a private equity backed subsea engineering business on the debt refinance
- Supported on the combination of multiple businesses to create an engineering group
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