The COVID-19 pandemic revealed to the world just how unprepared entire business sectors can be when it comes to unexpected events of mass proportion, and just how delicate our global supply chains actually are. COVID has been a health crisis that impacted lives, economies, and industries. Climate-driven events and disasters occur on a more concentrated scale but have proven to be extremely costly and disruptive to multiple sectors in various geographies—a problem that appears to be growing more prevalent.READ MORE >>
The global energy mix is comprised of the oil, liquefied natural gas (LNG), coal, renewable energy, and electricity sectors. The landscape of this industry has seen a great deal of change over the years, and is primed for even more change in the future. Five years ago, fossil fuels accounted for 82 percent of global primary energy. This number is targeted to decline, with large growth in the natural gas and renewable energy sectors, especially wind and solar. However, a rising global population and economic growth make it challenging for renewables to keep up with demand, meaning that fossil fuels will remain a primary source as energy demand will rise one percent each year over the next 20 years.
Oil & Gas
Oil output is projected to remain on the rise in the next 10 years, with 85 percent of the production increase coming from the United States. At the same time, oil demand is expected to slow after 2025 due to better fuel efficiency and more electric vehicles, according to a report by the International Energy Agency (IEA).
In 2020, shale production in the U.S. is expected to continue to grow even as growth is slowing due to reduced capital expenditures from drillers. Additionally, exports of U.S oil and LNG are forecasted to grow as infrastructure capacity increases.
As the number of U.S. oil and gas companies in distress grows amid limited funding options, there is an opportunity for smaller firms to be acquired by bigger firms, or for them to merge in order to scale operations and reduce costs. M&A strategies may be more appealing to these companies than the option of restructuring through bankruptcy.
Oil and gas prices should remain range-bound this year as production increases from non-OPEC nations such as the U.S., Brazil, and Norway.
Internationally, oil markets will be affected by the ongoing trade negotiations between the U.S. and China, as well as the result of the March expiration of the OPEC+ pledge between OPEC and non-OPEC partners for deeper production cuts.
The coal industry continues to experience challenges, including declining demand, bankruptcies, climate concerns, ownership changes, and mine closures. Coal production in the U.S. is expected to decline, along with the amount of energy production that relies on coal, which is at its lowest level in more than 40 years. In contrast to the struggling coal industry, increased growth is forecasted in the renewable energy sector. According to the IEA, market share for coal will fall from 38 percent today to 25 percent in 2040, largely due to a surge in more affordable solar power.
The outlook for the renewable energy industry in 2020 is quite favorable. The sector has already seen unprecedented growth propelled by increased demand, competitive costs, innovation, and the uniting of industry forces. Renewables are likely to become a preferred provider in electricity markets this year, as customers are more concerned with saving money and addressing climate change issues. Last year, renewable energy eclipsed coal for the first time ever in the United States, with wind and solar energy accounting for about half of renewable power generation. Companies that are poised to innovate and jump on new opportunities will be in a position to thrive in this new growth phase.
Some key points regarding this sector include the following:
- China has been the largest investor in renewable energy capacity, committing $758 billion over the past decade. The U.S. follows at $356 billion, with Japan third at $202 billion.
- Lower prices for renewable sources and battery storage have helped to drive growth in this industry, making wind and solar more competitive with traditional energy sources.
- Several utility companies have already outlined goals for de-carbonization and more are expected to follow suit.
- Renewable energy will need to be scaled up significantly in order to meet the goals outlined in the Paris Agreement.
- In 2019, 11 of the 28 countries in the European Union already met their 2020 renewable energy targets, but there has been a gradual slowing of the rate of renewable use because costs have fallen and less investment is needed to install the same level of power capacity.
- Grid modernization projects will also contribute to growth, as renewable microgrids are becoming more popular solutions for increased efficiency.
- In the U.S., the Production Tax Credit has been extended for 2020. However, the amount of the Solar Investment Tax Credit will be reduced from 30 percent to 26 percent. Both of these credits have been important drivers of growth in this market.
Power and utility companies will face several priorities and challenges in 2020, but with a balance of careful strategic planning, digital innovation, and risk management, the industry can sustain growth throughout the year.
- Clean energy remains a major priority, as many power and utility companies are setting their own clean energy goals to help customers make the transition.
- Cyber security is an increasing concern, with vulnerabilities being a clear and present danger.
- Preparation and response for natural disasters will be more significant as major storms have become more common around the world.
- Providers will continue to be more focused on improving the customer experience.
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The Role of Mining in the World
The global mining sector employs millions of people worldwide and its role in the global economy continues to significantly evolve. Standard functions in the mining industry include production of metals, and metals investing and trading. Additionally, there is a strong correlation between the global mining industry and other industries. For example, elements such as copper, nickel, and aluminum are core components used in the construction, aviation, automobile and other industries. In areas where mining is more concentrated, the industry plays a more important role in local economies.
According to the International Council on Mining and Metals, at least 70 countries are extremely dependent on the mining industry, and most low-income countries rely on it to survive. The same study shows that in many low-middle income countries, mining accounts for as much as 60-90% of total foreign direct investment.
Increased populations and urbanization drive the demand for growth in mining activities, as there is more demand for cars, buildings, and consumer products.
M&A Challenges and Considerations
Mergers and acquisitions can be intense in the global mining industry. They are heavily influenced by timing, fluctuating commodity prices, supply uncertainties, and come with many variables depending on transaction size, volatile markets, and the geo-location of the mine. There are certain considerations that are unique to the industry:
- Mining projects can have limited lifecycles depending on the availability of deposits.
- Mines cannot be relocated to areas that may be more beneficial economically or politically.
- Because there are great technological and geological constraints, mining companies are not able to adjust production to increase revenue.
- Funding is less readily available, access to bank financing is limited, and investors tend to be more cautious and selective.
- Countries may have greater government regulations, and indigenous mining agreements designed to mitigate negative effects and to share the benefits from commercial mining activity.
- In some parts of the world, there are human rights concerns, increased policing for corruption, and environmental impacts.
- Once the ore is extracted, mine closure procedures can take several years, in turn, expending money and labor for activities that are not yielding any profits during that time frame.
Gold Mining Sector
The gold mining industry is known for placing a high premium on growth. As of 2019, analysts reported that the leaders of gold mining companies say that they find mergers and acquisitions to be an easier path to growth than exploring for new untapped deposits underground. Modern M&A deals in the business of gold mining now focus more on capital efficiency and operational excellence, with heavy emphasis on evaluation of the management team.
Copper Mining Sector
Copper is an essential metal needed by industrial economies. Globally, the copper mining industry is one of the leading metal mining markets. The continued innovations in battery technology continue to attract investment into metals such as copper, which plays a critical component in the function of batteries.
Coal Mining Sector
Coal has been widely used to provide power since the Industrial Revolution in the 1800s. In the 21stcentury, coal mining faces new challenges alongside the pursuit and popularity of renewable energy sources. At the same time, innovation in the coal mining industry remains alive. New, state-of-the-art technologies are being developed. Sophisticated robotic mining machinery and computerized systems are being used to streamline mining and boost production to unprecedented levels. And industry leaders are looking into new uses for coal beyond its long-standing role in the energy sector. An example is the development of carbon fiber, currently used in the aerospace field, and potentially used in prosthetics, electrodes, 3D printers, and more.
Shared Buyer and Seller Risk
In the mining sector, both buyers and sellers alike face risks of deal failure, but are more likely to see success if a strategic plan is followed. Two of the most important factors are pricing efficiency and post-sale integration. Both buyers and sellers tend to be more cautious in this industry.
- Sellers should expect buyers to be on the lookout for the risk overpaying for your company, not being able to integrate the company as efficiently as possible, and dealing with issues such as uninsured legacy liabilities. Buyers may become interested in underperforming assets because they have more experience and access to financing that the existing owner, as well as better government relationships, a different risk profile, and the option of consolidation with existing mines or facilities.
- Sellers risk facing purchase price disputes and post-deal issues with warranty and indemnity claims. Plus, fluctuating markets, especially in mineral-rich regions such as Africa, can make valuation difficult.
If proper precautions are taken to understand and avoid these issues, overpayment or post-close surprises can be averted. Other benefits that come with proper preparation include improved sale and purchase agreements, smoother integration, and more efficient corporate governance. Enlisting experienced M&A advisors as early on in the process as possible can aid in significant mitigation of transactional risks.
Please feel free to call us at Benchmark International to set up a conversation with one of our M&A specialists if you are thinking about selling a business. We look forward to discussing how we can help you with growth strategies, exit planning, or any type of transaction advice you may need.READ MORE >>
The renewable energy industry is one of considerable expansion. Global efforts to cut back on the use of non-renewable energy and to reduce carbon emissions are proven to stimulate investment and growth.As the world’s energy needs continue to change, the opportunities for mergers and acquisitions continue to evolve. And as the big technology companies get involved in renewable investments, major oil and gas companies follow their lead.
M&A activity in renewable energy is driven by traditional energy businesses striving to acquire new capabilities, institutional investors seeking stable returns, public demands to address climate change, and countries working to integrate cleaner energies into their existing energy mix. The European Union expects to achieve 32% of renewable energy consumption by 2030.
Established, traditional power companies must rely on M&A to fill gaps in capabilities because they do not possess needed skills that were never part of the mix in traditional grid-based power systems.
Once viewed as a luxury form of energy only used in developed countries, renewable energy is now being adopted worldwide and in many developing countries, such as those in Africa and Latin America. Fossil fuel energy can be costly and difficult to transport and distribute in remote areas, making locally sourced renewable energy a practical option.
There are also other areas of continued development in the realm of renewable energy that offer M&A opportunities for investment and growth. These include the further development of electric vehicles, the electricity storage market—particularly battery technology—extending from technology manufacturers into the mineral supply chain and storage control systems. Digitization of the sector also presents the types of abundant opportunities that are inherent to technology and data in the 21stcentury.
Business Valuation As a Factor
Among the deal-specific factors that influence the valuation of individual renewable assets are:
- Asset quality
- Finance costs
- Regulatory stability
- The state of the wholesale energy market
- The competitive environment
- The lifecycle stage of the asset relative to the prevailing subsidy regime
- Curtailment risks beyond the control of the asset owner
Many governments offer incentives and subsidies for renewable energy production and use, strengthening the value of companies of this sector.
Key Due Diligence Areas
In the acquisition of a renewable power project, the following due diligence topics must be considered:
- The venture must have an energy generation license (or exemption from a license) and adhere to the terms of the license. It is also important to know if there has ever been a breach of the license.
- There must be assessment ofthe project’s profitability and any credit support requirements.
- It must be determined whether there will be any government subsidies for the project, which can affect its funding.
- Property rights and planning permissions must be documented, ensuring that the correct leases, easements, planning permissions, and consents are in place and compliant.
The following key contracts are specific to the renewable energy sector and will be needed:
- A shareholders’ agreement or joint venture agreement
- Power purchase agreement
- CFD or capacity agreement
- Fuel supply agreement (in the case of biomass or biofuel generating plant technologies)
- Engineering, procurement and construction contract
- Operation and maintenance (O&M) agreement
- Connection agreement
- Financing documents
Because completing an M&A transaction in the renewable energy industry is extraordinarily nuanced and complicated, and embroiled in tedious due diligence processes and paperwork, it is highly advised that you seek the expertise of an M&A advisory firm before attempting to broker a deal.
If you are considering selling your company, or even looking to plan an exit for your retirement, please call our M&A experts at Benchmark International to see how we can help you formulate a winning strategy. We are eager to get to work.READ MORE >>
Renewable energy transactions are on the rise as the demand for clean, sustainable energy grows around the world. Europe in particular has seen a surge in investments into wind power as big oil and gas companies try to shift to renewables. And there is significant competition in North America for high-priority assets. Both offshore and onshore wind investments are relatively safe as far as mergers and acquisitions because demand continues to rise in emerging markets as the worldwide weaning off of fossil fuels is certainly not going to happen overnight.
The wind energy industry is still relatively young to the world. There remains plenty of opportunity for technological and design advancements, as well as how they relate to financial possibilities.
Offshore wind in particular has inherent benefits. Because it is located out at sea, the visual impacts are minimized. Also, wind tends to be stronger and more consistent at sea then it is on land. It is highly sustainable and highly predictable. Floating turbine foundations for deep-water locations are emerging and have already been successfully implemented in countries such as Norway, Japan and Portugal.
Wind and Large-Scale M&A
Wind power transactions dominate large-scale renewable mergers and acquisitions because of the sector’s economy of scale. The larger a windmill is, the more efficient it is. So, one big windmill is more efficient than two smaller windmills. This translates into large construction projects—an attribute that the industry likes to see. Large corporations with bold goals for renewable energy are buying an abundance of wind power.
Innovations in wind energy make it more affordable, setting the stage for demand and growth, especially for large corporations that need a great deal of power and are looking to save money. (Think about Amazon’s huge wind farm in Texas that has 100 turbines and can power 90,000 U.S. homes). This corporate need calls for large projects and contributes to why wind power dominates large-scale M&A.
The Role of Tax Equity Investments
The wind energy industry is also subject to tax equity investing—a very important part of financing in the sector and popular in the United States. Tax equity deals for renewable energy projects are common with private energy developers seeking to extend capital, and financial institutions wanting credits to ease their tax liability.This can make the environment more competitive.
How it works:
- A tax equity investor and a developer create a holding company that owns the project's assets. The financial institution provides capital and in return gets tax benefits and cash distributions within the first 10 years of the project’s operation.
- This allows the investor to recoup and earn on their investment.
- Once the investment is recovered and tax credits captured, the ownership structure is reversed.
- The developer is now the majority owner and can have the right to buy out the investor's remaining stake.
- Therefore, the developer built a wind project for a small part of the installed cost in exchange for relinquishing the tax credits and cash distributions to the investor.
Clean Energy M&A Expertise
Any energy M&A transaction requires a specialized level of expertise in order to avoid pitfalls that can blow a deal. Finding the right company broker is advised.
- Knowledge of the industry and the nature of the markets are key
- The ability to identify areas of risk is imperative with painstaking due diligence
- Complex regulatory issues must be firmly understood. Laws and regulations in the energy industry go beyond the energy regulatory governance to include environmental, health, safety, tax, employee benefits and property issues
- Cross-border transactions require global and local understanding of the market and the regulatory differences and how it plays into the company valuation
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The global oil and gas industry is expected to remain relatively stable in 2019, even amid oversupply risks and volatile pricing, as oil demand continues to increase. Oil usage is expected to grow by more than 3.5 million barrels per day.
Key Industry Trends for 2019
- Natural gas remains a major player as a generator of lower-carbon power, especially in North America. Over the next decade, it is expected to surpass coal to become the second-largest source of fuel worldwide.
- China and India are leading the way in overall energy demand growth. India is projected to have the largest additional oil demand and fastest growth through 2040.
- U.S. sanctions on top exporters such as Iran and Venezuela continue to affect the global oil industry, as a retraction in the oil supply leads to inflated global oil prices.
- Improvements in infrastructure are becoming more critical because production and the physical ability to move products directly impacts pricing.
- The oil and gas pipeline market is predicted to grow at more than 6% by 2024.
- Sustainability is becoming a more central issue as renewable energy draws more investment from oil companies, and both consumers and companies wish to mitigate methane emissions.
- The industry is focusing on how digital technologies can improve capital productivity. Robotics, artificial intelligence, blockchain, and data analytics are being implemented to enhance efficiency and production.
- The oilfield services sector will see a 10 to 15 percent increase in earnings, with a positive outlook for offshore oilfield services. There are more than 100 new projects planned for 2019 approvals and $210 billion earmarked for offshore oilfield services worldwide.
- After years of limitations, deepwater exploration and production activity is likely to resurge this year with a spike in investments in deepwater projects.
Increased Drilling Activity
2019 is experiencing increased activity in global oil and gas drilling, led by the United States due to shale production. Outside the United States, global drilling activity is expected to rise by 2.5 percent. Across the world’s eight major oil and gas producing regions, each is predicted to see a higher number of wells drilled.
2019 Forecasted Percentage Increase in Drilling Activity by Region
Africa: 8.7 percent
Saudi Arabia: 5.4 percent
North America: 5.1 percent
Western Europe: 3.9 percent
South Pacific: 3 percent
United Arab Emirates: 2.5 percent
Far East/South Asia: 2.6 percent
South America: 1.7 percent
Eastern Europe/Former Soviet Union: 1.4 percent
Iraq: 1 percent
The most growth in the overall global drilling market will be in offshore oil and gas drilling, with expected growth at around 6 percent. The most active offshore drilling regions are Brazil, Canada, Norway, Angola, Nigeria, Saudi Arabia, Abu Dhabi, China, and India.
Rystad Energy has reported that global deepwater liquid production is set to reach a record high of 10.3 million barrels per day in 2019. This is a result of new fields in Brazil and the Gulf of Mexico. Other leading deepwater producers include Angola, Norway, and Nigeria.
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