As seen in Energy Voice, AAB's Callum Gray reflects on the last 12 months of activity in the Energy sector.
I wouldn’t expect much challenge with the view that the sector has encountered a ‘perfect storm’ in 2020 with the COVID-19 pandemic causing globally upheaval, financial markets nervousness and geo-political challenge. Throw into the mix the damaging price war between Saudi Arabia and Russia and the sector has encountered challenges much sterner than anyone could have foreseen in March when the World changed.
Lower production volumes, Brent Crude prices at near all-time lows, WTI futures turning negative for the first time ever and the demand-sapping lockdown restrictions have had a crippling effect on asset values with many E&P companies recognising significant impairment charges in the year and decommissioning brought forward. These sudden and disruptive implications to the industry were highlighted with final investment decisions on a number of North Sea projects such like Shell’s Jackdaw development and Siccar Point Energy’s Cambo project being delayed into 2021 at the earliest.
The first six months post lockdown portray some grim reading as a number of operators and service companies sought to rightsize their businesses during unprecedented times.
Whilst change is inevitable, it is worth highlighting that although society is demanding the provision of sustainable energy, hydrocarbons are here for some time. The need to promote and enhance sustainable energy sources has been incredible as pressure from multi stakeholders on traditional E&P companies and their triple bottom line has seen an rapid acceleration in the requirement to be ‘green’ and not just be seen to portray this image.
This has led to some interesting Boardroom discussions for businesses who have established themselves in the Oil & Gas industry and who have suffered from the double economic impacts of COVID-19 and crashes in commodity prices. As such, E&P companies have made high profile investments in renewable energy to balance their portfolios. Recently completed transactions including Total acquiring a 51% stake in the 1,140 megawatts Seagreen 1 offshore wind farm project from SSE and BP’s announcing it had “taken an important early step” in its move into offshore wind with the purchase of a £850m in two US offshore wind projects, Empire and Beacon, being developed by Norwegian oil state company Equinor.
Although M&A activity initially slowed as the equity markets continued to assess the impact of the pandemic and businesses focus on conserving cash, the reverse takeover of Premier Oil by Chrysaor is expected to be the first of a run of transactions in the space with consolidation through innovative deal structures a realistic and viable option for many debt laden operators.
Notwithstanding a slight lack in timing owing to the nature of work, oilfield service providers continue to feel the pinch of the oil price slump with margins under pressure and wider supply-chain cuts. Despite this, transactions are still being completed as acquirers sought to widen their technology and/or service offering. For example, Hunting’s £28m acquisition of production optimisation specialist Enpro Subsea from EV Private Equity and James Fisher’s acquisition of Maven-backed diving specialist Fathom Systems.
Looking ahead to 2021, the signs are telling that the industry has inherent problems beyond the immediate pandemic with rising pressure from environmental stakeholders forcing many to change direction into the renewables market with a focus on clean technologies. This is easier said than done!
The energy transition is not a short-term play and there is clear intent from the sector that it is embracing the challenge of achieving low carbon energy and assisting in meeting Government targets. Oil & Gas is very much here to stay albeit in a cleaner way, however, it appears that there will continue to be a steady flow of transactions involving companies supplying products and services to the renewables and CCS sectors.
You can find out more about AAB's work in the Energy sector here.