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Energy M&A

By: Francois Herman (McGill), Gurneek Gill (UCL), and Abilash Prabhakaran (MIT)

Photo: Jason Blackeye (Unsplash)


I. Industry Background

Despite the adverse impacts that energy, utilities and resources companies were facing in 2020 due to the onset of COVID-19 and the oil price collapse, Q1 and Q2 2021 deal volumes rose. While the average deal size in H1 2021 has consistently increased since the lows of the pandemic in Q2, it is yet to reach pre-pandemic levels. Nonetheless, the global average deal size increased by $130M from $72M in Q2 2020 to $202M in Q2 2021.

Much of the recovery seen in this sector is due to energy and power companies taking advantage of rising crude oil prices at around $65/barrel in April 2021 and exceedingly low-interest rates at around 0-0.25%. This allowed companies to refinance existing debts and thus return to drilling activities and acquisition of new-found acreage. Additionally, the recovery from the pandemic caused economies to increase their demand for energy and resources which had a huge impact on increasing deal making in the sector.

In 2021, more Special Purpose Acquisition Companies (SPACs) drove up deal multiples as they competed against strategic buyers and private equity groups for technology and assets that are not as harmful to the environment.

However, the desire for energy, utilities and resources companies to decarbonise and reach a net zero business platform was truly in action and that presented immense opportunities. M&A was and still remains a key method for the sector’s transformation to net zero, as companies sought partnerships and investments in green technologies. US President Biden’s signing of the Paris Agreement in Q1 2021 marked a key milestone for renewables M&A globally and it drove deal volume in this exciting sub-sector.

II. Chevron - Noble Midstream Partners

On March 5, 2021, Chevron Corporation (NYSE: CVX), the second-largest oil company in the US announced the acquisition of Noble Midstream Partners, LP (NASDAQ: NBLX), a US-based company owning and operating midstream infrastructure assets for oil and gas. The all-stock transaction, finalized in Q2 2021, is valued at $1.32B, establishing the price of Noble Midstream shares at $14.96 per share.

This deal follows the first transaction between the two actors, as in October of 2020 Chevron acquired rival Noble Energy in a $4.1 billion deal, gaining a nearly 63% stake in Noble Midstream. Through this series of deals, Chevron expanded its size and operations as it integrated large domestic and international natural gas reserves. Complementing Chevron’s upstream assets, the addition of Noble’s midstream activities will not only bring proven resources but operational synergies as Chevron expands vertically in the oil value chain.

“We believe this buy-in transaction is the best solution for all stakeholders, enabling us to simplify the governance structure and capture value in support of our leading positions in the DJ and Permian basins.” - Colin Parfitt (VP Midstream at Chevron)

Located in the southern part of the US, the Permian Basin has recently been the battleground for the oil industry with many large competitors fighting overabundant resources. Other transactions in the energy industry include ConocoPhillips acquiring part of Royal Dutch Shell, Chesapeake Energy Corp buying Vine Energy Inc., and Callon Petroleum Co. taking possession of Primexx Energy Partners. The reason for this particular geographical interest is the vast amount of untapped resources and relative proximity between the different drilling sites. This deal frenzy is not expected to stop in the near future, as multiple companies have expressed their interest in entering the Permian Basin and more deals could be on the horizon with rumours speculating that Shell could be on the lookout to sell their estimated $10B assets in the basin.

Citi acted as financial advisor for Chevron.

III. Cenovus Energy - Husky Energy

On January 5th, 2021, Alberta’s energy giant Cenovus Energy officially acquired fellow Canadian oil company Husky Energy. The all-stock buyout transaction is valued at $2.9B (CAD $3.8B). With Husky’s market cap valued at CAD $3.2B, Cenovus is offering a 19.5% premium on the deal. Cenovus common shares will continue to trade on the New York and Toronto stock exchanges (TSX & NYSE) under the ticker symbol CVE while Husky’s shares were removed from the TSX on January 5th.

The transaction between the two Calgary-based companies establishes Cenovus as the third-largest oil company in Canada. Synergies valued at around $1.2B were promised through the deal, mostly coming in the form of cost synergies. A few months after the acquisition, Cenovus reached record production rates demonstrating its smooth integration of Husky’s assets. In addition to its new operational prowess, Cenovus managed to turn around financial results in Q2 of 2021.

“The diverse portfolio will enable us to deliver stable cash flow through price cycles,” - Alex Pourbaix (Cenovus CEO)

As the pandemic and other global macroeconomic shocks contributed to the collapse of oil prices, the deal came at a pivotal time for Canada’s oil industry. The acquisition acted as a catalyst for the recovery of the oil sector and from it emerged a wave of optimism. Possessing the third largest reserve of crude oil in the world, Canada is also one of the few jurisdictions in the world allowing foreign investments in its oil and gas industry. These factors combined, make Canada a prime geographical target, as company’s look to expand through acquisitions rather than through their operations.

RBC Capital Markets and TD Securities are acting as financial advisors to Cenovus. Goldman Sachs Canada and CIBC Capital Markets are acting as financial advisors to Husky.

IV. Surge - Grenadier

Permian Basin-focused oil and gas company Surge Energy US Holdings Co.'s purchased the lease and producing wells in Howard County, Texas, from producer Grenadier Energy Partners II LLC for $420 million.

On January 31st 2021, Surge Energy US Holdings Company declared in the US that it, via its subsidiary, had signed a purchase and sale agreement to acquire a leasehold interest in producing wells from Grenadier Energy Partners II LLC (GEP II) in Howard County, Texas. The aggregate purchase price of the Transaction was estimated to be approximately USD $420M.

Surge Energy is focused on the development, exploitation, production and acquisition of oil and natural gas reserves in the Midland Basin of West Texas, thus the key highlights of the acquired assets include:

  • Average production of approximately 9,000 Boepd (approximately 75% oil)

  • Approximately 18,010 net leasehold acreage

  • Operated inventory of approximately 120 high-quality, economic future drilling locations

"This acquisition is consistent with our strategy of building a long-term, sustainable oil and gas company. The combination of both production and high-quality inventory support both near-term cash flow and strong economic returns for years to come.”- Linhua Guan, CEO of Surge Energy.

Overall, this deal shows signs that the recent trend of high-profile upstream deals, many of which are focused on the Permian, is likely to continue into 2021 as companies try to get oil and gas deals across the finish line while balancing commodity price risks and wide valuation spreads between buyers and sellers. However, lower upstream spending hit OFS (oilfield equipment and services) demand directly in H1 2021. There were only 28 deals announced in 2020 for this in this sub-sector; a huge decrease from the 61 announced in 2019. Partly, this is because many companies’ legacy asset bases have proven difficult to monetize unless equipment is withdrawn across many service lines, including drilling and pressure pumping. However, as Surge Energy has shown, these transactions could show potential for longer-term efficiency gains, boosting both productivity and service revenue.

Citi acted as financial advisors to Surge Energy. Jefferies LLC acted as financial advisor to GEP II. Legal advisors included Thompson & Knight LLP for Surge Energy and Vinson & Elkins LLP for GEP II.

V. Folsom Labs - Aurora Scholar

On August 9th 2021, Aurora Solar, an industry-leading software platform for solar sales and design, announced the acquisition of Folsom Labs, a company that is leading software solutions for the commercial solar sector. The valuation of the acquisition was not disclosed.

The deal quickens Aurora's strategy of offering the best-in-class tools for solar companies, from residential to large-scale commercial solar, and all teams within an organization. Similarly, Folsom Labs is a solar design and optimization start-up that operates in the same way as Aurora, but in the commercial sector of the solar market. Thus, both software companies will look to capitalise on potential cost synergies, to optimise the design and lower solar pricing, by reducing costs associated with customer acquisition, installer overhead, financing, contracts, inspection, permitting, interconnection and installation labour.

“Aurora Solar and Folsom Labs share a common mission to build a future of solar energy for all. We built our business to help the solar industry scale through technology, and adding the Folsom Labs team puts us in an even better position to drive the digital transformation of the solar industry." - Christopher Hopper, co-founder of Aurora Solar.

Funding and M&A activity in the solar sector shows that total corporate funding (including venture capital funding, public market and debt financing) in H1 of 2021 came to $13.5 billion compared to $4.6 billion in H1 2020, representing a 193% YoY increase. In 2020, the pandemic drove down funding and M&A related to solar projects as many projects were put on standby due to disruptions in supply chains and decreased demand due to the pandemic’s disturbances. However, corporate M&A activity has significantly increased recently in 2021, with solar developers, such as Aurora and Folsom, expanding their pipelines to capitalise on the word turning its attention back towards the transition from fossil fuels to renewables.

VI. Future Outlook

As we reach the end of an eventful 2021, the energy M&A sector is back to full power as it rebounded from the economic shock of the pandemic. Deal activity in the industry has been on a constant rise throughout the year and global M&A volumes in Q2 2021 were up by 27% compared to 2020. Although this growth was observed across all geographies, the Americas remain the most prolific region both in deal volume and deal values.

Going forward, capital availability will continue to be the main factor for deal-making. Most notably the recent wave of SPACs has targeted the transition to renewable sources of energy. As ESG standards and compliance are becoming more prominent, companies are divesting from traditional high-emitting resources towards what is believed to be the future of energy. Developing a clear long-term path for major energy companies is critical as we enter an irreversible stage of diminishing returns on oil production and other fossil energies. Moreover, the pandemic has acted as a catalyst for the transition to greener energies, and the M&A sector will continue to follow this trend. Consequently, the industry has seen an increase in venture capital investors and technology firms developing their innovations in the energy sector.

Although economic activity has returned to quasi-normal levels, the effects of the pandemic are still visible, with capital discipline and shareholder value as their main priorities. This makes declining assets such as oil still valuable investments in the short term for private equity and sovereign fund investors.

With the transition to renewable energies underway, the energy M&A sector will continue to see a new wave of long-term intended deals, accompanied by the more traditional upstream investment in geological extraction sites for oil. Following 2021, the outlook is bright for 2022 and deal volumes are expected to continue growing, barring any major macroeconomic shock.



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