European deal values across energy and natural resources saw an approximate 25% decrease from EUR 109.3bn in 2018 to EUR 81.7bn in 2019. Amid the worldwide decline in deal value, Europe nonetheless retained a 20% share of global EMU deal value from the year prior. The deal count likewise saw a decline, though somewhat less precipitous: from 473 in 2018 to 448 qualifying deals in 2019.

Within Europe, the deal values were quite evenly spread. The UK and Ireland garnered 16.5%, the DACH region 16.9%, Iberia 12.9%, the Nordic region 24.2% and the CEE region 13.6%.

Cooking with gas

However, as always, it is impossible to take a broad-brush approach to energy and natural resources deal flow, and despite the overall disappointing EMU numbers, 2019 was a very active year for oil and gas.

“A decent chunk of oil and gas M&A activity in 2019 involved further North Sea deals [both in the UK and Norway], continuing the theme of super majors exiting assets while smaller private equity-backed and listed independents come in and shoulder capital commitments,” Paul Stockley, partner at law firm Fieldfisher, said.

“This has resulted in a level of success, with many of these assets seeing life extension and further drilling activity.”

The second largest deal in the period was the sale of Exxon Mobil’s [NYSE:XOM] remaining Norwegian offshore interests to Var Energi, the vehicle jointly owned by Eni [BIT:EIN] and HitecVision, for approx. EUR 4.1bn.

Conoco Philip’s [NYSE:COP] sale of its remaining UK North Sea fields to EIG Partners-backed Chrysaor for EUR 2.4bn also made the top 10 deals. Other notable transactions include the sale of Chevron’s [NYSE:CVX] UK business to Delek Group-controlled Ithaca Energy for USD 1.7bn (EUR 1.5bn) in May, and Total’s [EPA:FP] sale of a portfolio of assets to Neo E&P and Petrogas for EUR 565m in July.

“This is likely to continue through 2020, however, the pool of buyers is becoming more limited, given that the first wave of PE-backed players, such as Siccar Point, have already started to look towards an exit,” Stockley said.

The ongoing sale of Blackstone and Blue Water Energy-backed Siccar Point has attracted a number of interested parties, however, for other maturing PE-backed investments the exit route is less clear. Rising climate change concerns has filtered through to institutional investor sentiment, tightening the chance of a successful IPO.

That said, this shift in energy sector mindset has also presented opportunities and deals in 2019.

Other oil and gas related deals in last year’s top 10 had some sort of energy transition angle. AP Moller Maersk’s [CPH:MAERSK] spinoff of Maersk Drilling, creatively renamed The Drilling Company of 1972 [CPH:DRLCO], was the next step in the shipping giant’s detachment from upstream oil and gas.

Also in Denmark, Orsted [CPH:ORSTED] sold, after a politically torpedoed first attempt earlier in the year, its power distribution business Radius and two other subsidiaries to local strategic SEAS-NVE for EUR 2.9bn.

Until only a few years ago the company, formerly known as Dong Energy, was a state-owned integrated energy player and a major producer of oil and gas, but Orsted is now a listed pure-play renewable power generation company. An attractive takeover target, some might think.

Meanwhile, gas, as a bridging fuel, becomes ever more the focus of energy players. This is reflected in the level of LNG project-finance related M&A activity, most notably the sale by Novatek [MCX:NVTK] of a 10% stake in the Arctic LNG project to the Japan Arctic LNG consortium, comprised of Mitsui [TYO:8031] and Jogmec.

“The ongoing transition related to climate change will also influence M&A going into 2020. In some quarters, oil is the new tobacco,” Stockley said. “Last year saw a step change in diversification M&A, such as Shell’s [LON:RDSA] acquisitions into EV-charging technology companies and its interest in the Eneco auction.”

The EUR 4.4bn sale of Dutch power, chiefly renewables, and utility company Eneco – the largest deal for the year, and ultimately won by Mitsubishi Corps [TYO:8058] – is the best example of the ongoing transition and change in mindset among sector participants.

The long-prepared auction of this municipality-owned business saw the participation of both Shell  and Total, and would have represented a most significant step out into power generation and supply for any European oil major.

Power and utilities under the microscope

Indeed, the oil majors are one of a number of new types of buy-side investors to disrupt the power and utilities space. Regulatory concerns around foreign ownership of European power generation and transmission assets saw potential Chinese acquisitions fall short, such as with China Three Gorges attempt to acquire a majority stake in EDP [ELI:EDP].

“This year has shown political considerations being increasingly important to sellers, and have also marked an increase in the importance of strategic bidders and entrants trying to secure new market platforms – with examples including Mitsubishi Corps’ OVO investment, Total and Shell’s participation in the Eneco auction, and KKR and BlackRock investing into ADNOC's oil pipelines in the Middle East,” Miles Bradbury, energy and infrastructure partner at KPMG, said.

The OVO transaction is another example of an important trend for strategics to buckle down and focus on getting energy retail and supply right. The UK has been a difficult market in which to operate in this sector, with the tradition Big Six suppliers suffering losses, price caps, and the pre-election fear of nationalisation.

However, new players are keen to consolidate the space and improve its economics. OVO went on to acquire SSE’s [LON:SSE] retail business for GBP 500m in September, following SSE’s failure to merge the business with innogy’s Npower, which itself was reluctantly adopted, and drastically shrunk, by E.ON [ETR:EOAN].

Consolidation has continued into 2020, with Octopus Energy recently acquiring Engie’s [EPA:ENGI] UK supply business.

The result of this distress is that the traditional Big Six - EDF Energy, E.ON UK, Npower, SSE, Centrica [LON:CNA], and Iberdrola [BME:IBER]-backed Scottish Power – no longer exists. Npower has been folded up, SSE is replaced by OVO, Centrica is on the ropes, and neither EDF or E.ON seem overly enthusiastic about the UK market.

Therefore, further deals in the energy retail space are likely to occur in 2020, with Centrica, for example, tipped as a likely target should it achieve the ongoing divestments of its mature nuclear and upstream oil and gas interests.

SSE is also a clear target now that it has jettisoned the retail business and nationalisation fears have subsided.

“The deal activity last year across the power and utilities sector remained strong, although an increase in public listed company M&A did not necessarily translate into an increase in the overall number of announced deals,”

Miner deal flow

The third pillar of the EMU landscape is mining, however, no deals from the space entered the top 10 transactions, and the sector represented just 2.5% of total European EMU deal count.

Although the mining majors are often London listed, their assets, and the majority of transactions, are usually found outside Europe. That said, recent weeks have seen a rebuffed offer on London-listed GBP 1.4bn gold miner Centamin [LON:CYE] by its Canadian peer Endeavour [TSE:EDV] and Anglo American [LON:AAL] launch the acquisition of UK-based polyhalite miner Sirius Minerals [LON:SXX] for GBP 405m.

The gold sector continues to see consolidation and Centamin is probably not the last European company in that space to see a potential transaction.

Overall, 2019 has seemed far busier for dealmakers and market observers than the numbers would suggest. It is likely that many of the deals that never made it onto the public stage will come to light as hope for political stability and steady commodity prices lay a sure foundation for transactions across the energy and natural resources sectors.

by Patrick Harris, with analytics by Andrea Putaturo and Thorsten Louie Pedersen

Patrick Harris Head of Energy & Natural Resources, EMEA Mergermarket