I wouldn’t expect many to challenge the view that the energy sector encountered a “perfect storm” in 2020 with the Covid-19 pandemic causing global upheaval, financial markets’ nervousness and geo-political challenges.
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 the first quarter of 2020, when the world changed.
Lower production volumes, Brent Crude prices at near all-time lows, West Texas Intermediate WTI futures turning negative for the first time ever and the demand-sapping lockdown restrictions have had a crippling effect on asset values. Many exploration and production (E&P) companies have recognised significant impairment charges in the year and brought forward decommissioning.
These sudden and disruptive implications were highlighted by final investment decisions on a number of North Sea projects, such as Shell’s Jackdaw development and Siccar Point Energy’s Cambo project, being delayed until 2021 at the earliest.
The six months after the initial lockdown in the UK provided some grim reading as a number of operators and service companies sought to rightsize their businesses during these 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 transition to sustainable energy sources has been growing as pressure from 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 a green image.
This has led to interesting boardroom discussions in established businesses in the oil and gas industry that have suffered from the double economic impacts of Covid-19 and crashes in commodity prices.
As a result, E&P companies have made notable investments in renewable energy to balance their portfolios. Total recently acquired a 51% stake in the 1,140 megawatt Seagreen 1 offshore wind farm project from SSE, and BP announced it had “taken an important early step” in its move into offshore wind with an £850 million stake in two US offshore wind projects, Empire and Beacon, being developed by Norwegian state oil company, Equinor.
Although M&A activity initially slowed as the equity markets continued to assess the impact of the pandemic, and businesses focused 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.
Oilfield service providers continue to feel the pinch of the oil price slump with margins under pressure and wider supply chain cuts, although transactions are still being completed as acquirers seek to widen their technology or service offering. Examples include Hunting’s £28 million 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 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 supporting the drive towards government targets.
Oil and gas is very much here to stay, albeit in a cleaner way, though it appears that there will continue to be a steady flow of transactions involving companies supplying products and services to the renewables and carbon capture and storage sectors.
Callum Gray, Corporate Finance Director, Anderson Anderson & Brown
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