We anticipate a mixed but promising year for Energy sector M&A transactions in 2018 as the market continues to stabilize and companies increasingly position themselves for greater earnings growth.
According to M&A Predictor data, corporate appetite for M&A deals in the Oil & Gas sector, as measured by forward P/E ratios, is expected to decline by 10 percent in 2018 versus 2017, while appetite for M&A deals in the Utilities sector is expected to rise by 2 percent in 2018. The capacity of corporates to fund M&A growth is expected to rise by 11 percent for the Oil & Gas sector and 2 percent for the Utilities sector.
“Although they might never get back to the profitability levels of 2014 and earlier, energy companies will continue to realize that they are making money, paying down debt and getting healthier - and are now in a much better position to pursue transactions. The gap between the bid and the ask in the oil and gas markets could fully close in 2018, prompting the beginning of an increase in deal activity,” says Henry Berling, KPMG in the United States.
We see this playing out in Q1 2018 as deal value rose about 11 percent to US$184 billion, despite an 18-percent drop in deal volume to 484. The average size of deals in Q1 2018 (US$380 million) is now the highest in 10 years by a significant margin.
The 2018 renewables market continues to be attractive and promising, says Manuel Santillana, Global ENR Deal Advisory Lead. “We expect activity to continue moving toward clean energy businesses over the next year or two - the trend toward cleaner generation sources is happening and will continue. Specifically, Southeast Asia, China and India will continue their healthy growth into renewable energies and transactions.”
“The Utilities environment, however, looks more complicated and challenging,” Henry adds. “The market has shifted and we're entering an environment that's very short-term. The market is adjusting to an economic model that supports buying long-term assets with less contract coverage compared to previous years. The Utilities sector side of things will likely be fairly flat and somewhat opportunistic as people work through that market shift.”
For additional insights into renewable energy deal trends for 2018 please see KPMG's report: Great expectations | Deal making in the renewable energy sector.
The oil and gas market “hit a floor” in 2017, Henry notes, indicating a return to market stability and profitability and a drive for earnings growth. “We've gone from a `sky is falling' perspective to a new comfort level now that things have stabilized. Energy businesses are beginning to drive for earnings growth and there is no shortage of available funding in oil and gas, particularly the services side. Companies are willing to re-enter the market, including a big push internationally to invest in North America.”
Deal activity for 2017 in the Energy sector was flat at 2,311 deals while deal value in 2017 was down 16 percent at US$530 billion versus US$631 billion for 2016. Average deal size for 2017 was US$229 million, off about 15 percent from US$273 million for 2016. The M&A Predictor's outlook was for the Oil & Gas sector's corporate appetite to rise 16 percent and the capacity to transact to rise 23 percent and, in the Utilities sector, for corporate appetite to rise 6 percent and the capacity to transact to decline by about 3 percent.