By Leah MacDougal Jones, Director, Datasite

The shift towards clean, sustainable power is accelerating around the globe, creating novel opportunities for consolidation, investment, and acquisition.

For Mergermarket's 2021 Energy M&A Forum sponsored by Datasite, the hosts organized a suite of in-depth discussions to explore the changing face of M&A in energy.  Expert guests weighed in on topics ranging from mergers in traditional oil and gas to creative investments in alternative power.

Portfolio Strategies in the Energy Transition

The event kicked off with a panel on evolving strategies in power and infrastructure investment. The playing field looks very different than it did just five years ago, and companies with strong ESG bona fides are looking ever more attractive to buyers.

Some of this is down to simple economics. Ari Pribadi, the Senior Managing Director at Marathon Capital, explained: “On a fundamental level, the costs of energy for renewables are very different nowadays…in many areas in the US and the world, renewables are the lowest-cost energy.”

Investment funds and credit agencies are also increasingly ESG-conscious, creating additional incentives for companies to pursue sustainability.

The panelists acknowledged that there’s still a need for a consistent methodology to factor carbon externalities into asset price. But Andrew Ward, founder and Managing Partner of Clearstream Capital, pointed out that conditions are increasingly ripe for widespread adoption of this kind of ESG-focused cost analysis.

Meanwhile, investments in the energy transition have expanded well beyond conventional utility-scale wind and solar, and traditional energy companies are seeking ways to move toward cleaner generation and transmission.

“The energy businesses today…all want to be part of the energy future,” noted Ward. These companies’ existing assets in transportation and transmission infrastructure give them a unique ability to drive progress in areas like hydrogen or renewable natural gas.

“The energy transition as it relates to hydrocarbons offers a unique opportunity for investors,” said Grant Davis, a Managing Director at First Avenue Partners. “So many people have pulled back completely from that sector based on a blanket view that hydrocarbon is bad.”

That leaves an opening for investors who understand that oil and gas will be around for a long time to come and are willing to invest in incremental change toward cleaner energy models.

The panelists all predicted a substantial volume of transition-focused M&A deals in the coming years, helped along by changes in priorities among lawmakers, credit agencies, and investors.

“I think the activity is going to continue at a frenzied pace,” Davis said.

Fireside Chat With Recep Kendircioglu

To get an in-depth look at the current outlook for investment in the energy transition, Infralogic’s reporter Bianca Giacobone talked with Recep Kendircioglu, the Head of Infrastructure Investments for Manulife. Kendircioglu, who recently closed his firm’s second infrastructure fund at $4.65 billion, shared his thoughts on the state of play in sustainability-focused investment.

Today’s LPs, he said, are very interested in renewables - or, at minimum, companies with a thoroughly worked-out plan for transitioning to cleaner energy.

“For a long time, investors wanted managers to be ESG-conscious…but the demands of the investors are now much higher. They’re saying, ‘Show me the proof.’”

Kendircioglu highlighted some sub-sectors of the energy field that show particular promise, like offshore wind and community solar. He also mentioned battery storage, which in his view is “the next holy grail” for alternative power. Intermittency remains the biggest obstacle for renewables. Reliable, low-cost storage would be a game-changer.

Kendircioglu explained that his fund’s philosophy is to look for partnerships over all-out acquisitions - “finding and supporting management teams to grow their business and accelerate their growth, make them more successful.”

With so many factors pushing the world toward sustainable power, he’s optimistic about the future of renewable infrastructure. 

“I think that energy transition is here to stay,” he said. “It’s really an exciting time in the market.”

Alternative Opportunities

The next panel examined trends and shifts in the types of alternative energy deals that are attracting investors. In the last few years, the market has expanded, the amount of available capital has increased, and the risk profile for renewables has changed substantially. Buyers have responded by pursuing a wider range of targets.

“It used to be that all the capital was looking at utility-scale wind and solar, but that is no longer the case,” said panelist Brendan Bell, the COO of Aligned Climate Capital. “People have gotten comfortable with other parts of this broader transition.”

Those other parts include innovations like community solar, distributed resources, energy storage, and vehicle electrification.

“Part of that is driven by returns,” said Dennis Tsesarsky, the CEO and Managing Partner of Onpeak Capital. “Utility-scale wind and solar is bid to perfection…[distributed generation] offers a higher return.”

As the market moves away from a vision of alternative energy based on centralized power plants, new kinds of players have entered the space. Examples include data centers looking to generate more of their power supply in-house, or the home security company ADT, which is buying into residential solar as part of a bundle of services for homeowners.

Turning to the future, the panel discussed the next wave of exciting opportunities they expect to emerge.

“One of the nice things about climate change is that we know where the problem comes from,” Bell said. “Energy, transport, buildings, land use. Those are where the solutions have to be.”

One such solution is transport electrification; Bell expects the 2020s to be the decade of the electric vehicle, with a corresponding wave of opportunities in battery storage.

“Here in the US, there’s also carbon capture and sequestration,” added Todd Bright, the co-head of investment in the Americas for Partners Group. “It’s harder to fuel-switch your way out of carbon emissions on the industrial side, and the answer there is post-combustion capture of the CO2.”

Thanks to the enhanced oil recovery business, he pointed out, the infrastructure and the expertise are there. Those assets could easily be repurposed for carbon sequestration. And the tax credits to provide a financial incentive for that shift have bipartisan support in the US legislature.

Oil & Gas Consolidation

The conference’s closing panel looked at the prospects for M&A in the more traditional energy world. After around a year and a half of depressed activity, deal volumes in oil and gas are surging once again. Both panelists agreed that rising commodity prices are a huge factor in that shift.

“Activity is up, discussions are up,” said Grant Butkus of RBC Capital Markets. “This year is going to be one of the busiest over the last several years.”

Most of that activity is in consolidation, said Edward Geiser, a managing partner at Juniper Capital. Private equity-financed acquisitions are way down, with many big players moving away from energy or shifting toward renewables. “People are looking at a much smaller group that can actually write the check and pull together the financing, especially once you get to deals above a certain size.”

The panelists weren’t necessarily bothered by this flight of capital from oil and gas - it leaves them with less competition for assets that still offer very favorable yields and returns.

Moderator Tom Davidson, an Assistant Editor at Mergermarket, asked about the prevalence of distressed M&A in the traditional energy space.

“We don’t see as much of the distressed selling for ESG reasons as you might think,” Butkus said, explaining that most operators aren’t necessarily looking to get rid of oil and gas assets. Instead, they’re searching for ways to use existing cash flows and skillsets to better position themselves for the energy transition.

Geiser agreed that most people selling right now aren’t distressed in the traditional sense. Some are lenders who took over assets from bankrupt borrowers and are bringing them to market to recover some capital. Others are PE-backed businesses that are finally able to sell after years of a sluggish M&A market. Still others are companies that have recently consolidated and are looking to get rid of non-core assets.

Davidson noted that there’s been talk for years about the need for large-scale consolidation in the energy industry, and asked the guests if they thought the time was now ripe. Butkus said that discussions along those lines have increased, but that talk won’t translate into much action without a bit more stability in commodity prices.

Geiser agreed. Though his firm has publicly expressed interest in expanding, he said, they weren’t going to pursue consolidation for its own sake.

The panelists also discussed the difficulty of getting debt financing for oil and gas. There are fewer lenders interested in backing traditional energy deals, and those that remain are more cautious about where they put their capital. That’s true for both private equity and reserve-backed loans.

“What they’re looking for from a scale and asset diversity standpoint is a much higher bar to clear for oil and gas companies,” Geiser said.

Butkus noted that the public markets have been unusually volatile, meaning that deals have a smaller window in which to close.

“There’s equity and debt available for the right deal and the right companies, but not at the sample level we’ve seen historically,” he said. “So that is putting some pressure on transactions.”

On the plus side, he noted, valuations are coming up despite downward pressure from the high cost of capital.

The Outlook for Energy M&A

There are good reasons for optimism about the future of mergers and acquisitions across the energy space. Whether you’re looking at tried-and-true hydrocarbon assets or cutting-edge innovations, the opportunities for growth are multiplying.

For a full replay of all sessions from the 2021 Energy Forum, click here. Datasite and Mergermarket will continue to bring you perspectives from industry experts as the world’s energy future takes shape.