IMPROVED ACCESS TO CAPITAL FOR SUPPLIERS AND INVESTORS
The survey results revealed an unexpectedly positive outlook on the current financing landscape, with 66% of energy suppliers and investors reporting an improvement compared to the previous year even as interest rates in the U.S., the EU and the U.K. have remained elevated.
It is worth noting that the European Central Bank’s decision to lower rates in mid-June was taken as survey responses were being collected, and prior to the Bank of England's August decision to reduce rates for the first time since March 2020, and the U.S. Federal Reserve's 50 bp rate reduction on September 18, 2024.
This sentiment may have been attributed to anticipation of future rate reductions. Indeed, since the survey fielded in Q2, expectations have grown that the U.S. might lower its rates soon.
Additional factors likely contributing to this positive outlook include increased funding from governmental and affiliated organizations, as well as strategic consolidation within various industries.
More than
of energy suppliers have invested in new projects in the last year
Significant investment in new projects this year
The assertion that financing has improved is substantiated by investment trends. More than 75% of energy suppliers have invested in new projects in the last year, citing rate of return (52%), portfolio diversification (51%), and access to financing (47%) as the primary drivers of their activity. On a related note, respondents expect M&A to increase substantially (42%) or remain at current levels (38%) over the next 12 months.
Improvement in financing is seen most strongly in the U.S. and in Latin America. The U.S. has seen continued consolidation in oil and gas and, as noted above, recent government legislation such as the Inflation Reduction Act and the Bipartisan Infrastructure Law is either directly or indirectly driving investment.
The picture in Latin America is less clear. We have seen continued Chinese foreign direct investment in Latin America’s energy sector and strategic investment on the part of energy majors such as Exxon and Chevron – most notably in Guyana – or World Bank and other IGO investment, especially in hydrogen in Chile and Colombia.
Latin America’s critical minerals potential makes it one of the highest regions of interest to the mining industry.
The associated supply chain benefits the region’s economy and helps attract new investors.
Latin America has embraced advanced biofuels development and has the potential to become a major producer of low-cost hydrogen, particularly in Uruguay and Chile.
Legislation has been favorable as well. Argentina just passed the Incentive for Large Investments Regime, and Brazil recently adopted new legislation in support of hydrogen.
Factors driving improved financing are likely country-specific, but overall we see a positive picture.
How, if at all, have financing conditions improved this year? (energy suppliers and investors)
Mixed investment across resources and energy technologies
Project investment priorities are diversified across various energy sources and geographies. Energy suppliers indicated an increased focus or ongoing focus somewhat evenly across solar (51%), green hydrogen (45%), natural gas (44%), wind (44%), carbon capture (44%) and battery storage (42%).
Solar interest is highest in Latin America (61%) where government incentives have played a role. Green hydrogen investment appears to be highest in the Middle East (60%), potentially as a defensive measure against declining oil exports, followed by the U.S. (52%) where $750m of Inflation Reduction Act funding is driving investment.
The U.S. is seeing the most activity occurring in natural gas/LNG (58%), where 200 million tons of export capacity will come online in the next five years, and wind (51%). Green hydrogen (46%), heat networks (43%) and battery storage (42%) are the leading priorities in the U.K.
Solar interest is highest in Latin America
where government incentives have played a role
Green hydrogen investment appears to be highest in the Middle East
potentially as a defensive measure against declining oil exports
What generation types do you envision in your energy mix in future years (“more focus” responses from suppliers)?
Rising M&A activity with increasingly complex transactions
U.S.-based energy suppliers and investors were most constructive on M&A activity (58%), followed by the Middle East (50%), and the U.K. (47%). The accelerating pace and increasing complexity of energy transactions in recent months make this expectation of continued momentum particularly noteworthy. Energy suppliers and investors now pursue deals for reasons that go well beyond the traditional motivations of increased market share and synergies. Companies pursue mergers and seek to acquire (and divest) assets in order to enhance portfolio sustainability, diversify products, acquire skilled workforce, optimize value in response to regulation, and enhance energy security. While oil and gas consolidation has figured prominently in the U.S., this acquisitive trend is not focused on fossil fuel-based providers alone.
Globally, the value of power industry M&A related to renewable energy increased by 13% in Q1 of 2024 versus Q4 2023. In the U.K., power industry M&A activity rose by 62% during the first quarter of 2024 v. Q4 2023, and included significant wind industry assets.
How do you anticipate M&A activity in the energy sector will evolve in the coming 12 months?
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