By Irina Slav
- Investors are suddenly recognizing the importance of energy security.
- Investors’ confidence in the US LNG sector has skyrocketed.
- Dealmaking in both upstream gas and utilities is increasing in 2022.
Despite the runaway recession and depressing prices at the pump, the U.S. economy has been on a recovery course for several months now, and dealmaking trends appear to confirm it is the correct course. In the utility space, a lot of deals over the first quarter of this year were in the renewable energy space—nothing surprising there. But more deals were in the gas utility space. Gas is staging a comeback.
In its latest “Power and utilities transactions and trends” report, EY noted that total deals in the renewable energy and gas utility space over the first quarter hit $38.5 billion, representing 80 percent of total dealmaking activity in the energy space. And while renewable energy deals had a higher value and a much bigger volume, two gas utility megadeals put the segment in the spotlight.
The megadeals were the acquisition, by a consortium of institutional investors, of 60 percent of the UK’s National Grid’s gas and transmission business, and the acquisition, by Infrastructure Fund, of South Jersey Industries. The first deal was worth $10.5 billion. The second fetched $7.6 billion. Compared to these, the deals in the renewable energy space were relatively small.
Of course, it’s not just gas utilities that are in the spotlight of dealmaking, and the EY report is yet another proof of that. With Europe’s emergence as a huge LNG consumer, the LNG segment of the industry has also risen to prominence.
“Across Europe, new liquefied natural gas (LNG) import capacity and pipelines would be required to source gas from elsewhere,” said Miles Huq, Partner, Strategy and Transactions.
“Investors’ confidence in the US LNG sector has skyrocketed leading to a race to bring export projects online. This favorable investor sentiment has been supported by US and European leaders’ recent announcement of a cooperation plan to help European countries move away from Russian gas supply,” he also said.
The U.S. is about to become the largest exporter of liquefied natural gas in terms of capacity by the end of this year, according to multiple forecasts. Its actual exports of LNG already hit a record in 2021 and have been going even stronger this year, especially after Russia’s invasion of Ukraine.
This is naturally bullish for the industry, motivating more mergers and acquisitions. The challenge here is to secure enough primary natural gas production.
Reuters’ John Kemp wrote in a recent column that natural gas extraction in the U.S. would need to accelerate significantly in order for LNG exporters to be able to meet demand. Noting that U.S. LNG exports to Europe were 87 percent higher in the first quarter of 2022 from the same period in 2019, or 674 billion cu ft, Kemp noted that at the same time, production had only risen by 433 billion cu ft.
With demand expected to remain strong as Europe seeks to wean itself off Russian hydrocarbons, and with Asian demand traditionally strong, U.S. LNG producers would really need to step it up, and to do that, they would need more natural gas. It is an environment conducive to consolidation.
Both the LNG export trends and dealmaking in the gas utility space highlight one thing that the EY report notes as well: energy security has come to the fore, overtaking affordability and sustainability, at least temporarily.
The EY report noted Europe’s shift from an almost exclusive focus on sustainability as one clear demonstration of how energy security can trump everything else. It was energy security, in fact, that drew European buyers to U.S. LNG, previously treated with suspicion because of the shale gas production’s emission footprint. In a notable about-turn, France’s Engie, which had a couple of years ago canceled a long-term deal for importing U.S. LNG because of emission concerns now happily signed on the dotted line.
Dealmaking activity in the gas utility space also suggests attention is being turned to energy security even though renewables are still investors’ darlings. Globally, deals in the renewable energy segment totaled $19.6 billion, spread across 104 deals, which was the largest deal volume across segments. This, by the way, compared with $18.8 billion in deals in the gas utility space, but spread across just three deals.
The outlook remains quite bullish, according to EY, with a special note about the gas utility sector, where improving public market sentiment is seen driving stronger dealmaking activity. The immediate future of the M&A market in energy and utilities, however, is not without its challenges, chief among which appears to be regulation.
“Regulatory M&A approvals are evolving, and precedents do not guarantee outcomes. Public awareness, scrutiny and engagement on complex issues that include consumer data and privacy; national interest and security; job creation; public perception; and environmental, social and governance profile are expected to increase even further in the coming year,” the EY report noted.
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