Shaping A New Era in Energy M&A

The energy transition is spurring a series of mergers among major oil producers, but will the consolidation and megamergers slow or spur deal-making?

A New Market Requires New Thinking

The energy transition away from fossil fuels to new, green alternatives creates a fork in the road for traditional energy companies. Do they stay the course on fossil fuels, expecting demand to continue while supply dwindles after reaching peak oil? Or do they embrace the transition - and the cost - of being more environmentally friendly? The transition is leading to divestment in one sector but a broadening of the pool of investors, which allows for larger volumes of capital for M&A in new projects. Analysts believe that the trend towards consolidation in the energy industry will be maintained into the next year.

That doesn't mean there won't be hiccups along the way. Q3 M&A in the US energy sector saw a slowing in the amount of money involved compared to the prior quarter. Not only had the cost of financing deals increased due to the Fed, but analysts also pointed to the expected dwindling of deals due to the best buyout options already being executed. But the historic deals of Exxon and Chevron, worth hundreds of billions of dollars, might revert that trajectory. Exxon bought out Pioneer in an all-share deal valued at $59.5B in stock, while Chevron bought out Hess in a $53B all-stock deal.

Going Global and What's Next

Recent energy M&A has focused more on the US, but the Exxon deal for Hess suggests interest beyond consolidation in the Permian Basin. Europe, in particular, faces challenges in the energy sector as it transforms the grid in favour of renewables and has to adjust to no longer buying from Russia. The crisis in supply over the last winter might have dampened interest in opportunistic deal-making, but now that energy companies are adjusting to the new normal, the majority of executives say that M&A in Europe is likely to pick up over the next 12 months.

Though looking at the last quarter, European deals can be less spectacular and thus capture fewer headlines but offer more opportunities. Europe saw a total of $5.6B in M&A in the energy sector during Q3, which is less than half of the $14B in the US in the same period. However, the US saw just 25 mergers, while the EU had 146. There is a divergence between the two largest economies on either side of the Atlantic, as Americans concentrate on large deals while smaller companies in Europe are consolidating. However, that could also be a sign of the emerging importance of renewables, as the European deals concentrated on acquisitions of new energy, such as the takeover of renewables company ConourGlobal by KKR and AXA's acquisition of the Hornsea 2 wind project.

KKR & Co. ended Wedge Pullback

The stock price of KKR has bottomed at $42 for now, hitting fresh 2023 highs following a pullback after its wedge competition at $65. Further upside would imply a leg towards the peak of $84, should $73 and $80 give way to bulls. Conversely, losing $60 will shift changes, exposing $54 and increasing the probability of invalidation.

Source: SpreadEx / KKR & CO

Key Takeaways

The energy transition is driving consolidation through M&A. While Q3 M&A slowed due to financing costs, deals like Exxon's buyout of Pioneer and Chevron's purchase of Hess suggest the trend may continue. Most M&A has focused on the US Permian Basin. But Hess shows interest in expanding beyond. European energy companies also consolidated to supply renewables after cutting Russian gas. Though European deals tend to be smaller, the volume suggests renewables acquisitions are becoming more critical.