2021 was another tumultuous year across many different parts of the energy industry, with businesses of all sizes finding new ways to adapt their operations in the face of ongoing disruptions and uncertainty caused by the COVID-19 pandemic.
For the oil and gas (O&G) sector, and particularly for deal-making within O&G, the pandemic accelerated trends that had been gradually emerging. Many of these industry movements are addressing attitude shifts toward the expansion of renewable energy options, pressure for lower-carbon technologies, and realigning of assets across the O&G space.
In December, PwC released our 2022 Deals Outlook, which examines how dealmaking in 2021 could affect the future of deals in 2022. Overall, the unrelenting pandemic created a need for flexibility in dealmaking in 2021, as seen in the deal structures. We saw deal volume increase to pre-pandemic levels, as the number of deals (152) exceeded those in 2019 (134).
O&G deals in 2021 totaled more than $130 billion. This rebound foresees continued levels of high transaction volume in 2022, especially given that the volume of deals greatly increased in the second half of 2021. This increase was particularly present in upstream, where the majority of growth occurred in the past 12 months, bringing a wave of momentum to close out the year with anticipated growth continuing into 2022.
While increases in deal volume and value give us optimism for 2022, companies should consider several key factors that emerged in 2021.
One of the biggest trends we’ve observed is how energy companies of all sizes have felt growing pressure from environmental, social, and governance (ESG) concerns, as well as shifts in public policy trends. This pressure will likely encourage more fossil-fuel-related divestments and ongoing attention shifts toward expanding into renewable energy technologies.
As a result, we expect 2022 deals to be driven by the re-positioning and optimizing of portfolios to adapt to changing markets and ESG trends, as well as an increased focus on two other areas that are commanding heightened attention within the industry: cyber security and infrastructure resiliency, as several high-profile cyber incidents caused disruptions throughout the O&G supply chain. These forced companies to re-examine their systems, upgrade their cyber security to protect assets, harden their infrastructure, and re-assess the resiliency of their cyber footprints.
Throughout 2021, we saw the industry increasingly consider public policy initiatives focused on the reduction of carbon emissions and combating climate change as a dealmaking factor. This shift in public opinion trends was coupled with growing investor demands towards ESG-conscious business operations. It resulted in energy companies exploring options for adding renewable energy and cleantech assets to their energy mix.
We expect this to continue to influence dealmaking in 2022, as expanding domestic policy initiatives look to favor renewable and efficient technology development aimed at incorporating these assets into upstream portfolios over more traditional energy production sources in O&G.
We may also see further evidence of a trend toward the potential for large energy companies to either divest assets or move operations in response to evolving regulatory and tax policies. While there was momentum for greener energy previously, the pandemic has accelerated these efforts due to potential infrastructure investment initiatives and a renewed focus on climate change.
If larger upstream companies divest existing assets to focus on ESG and greener investments, midstream and downstream companies may grow cautious in the next decade about committing to expensive projects.
Last year we saw this transition into a prominent trend throughout O&G that will likely expand and continue to influence dealmaking in the years ahead.
The future of dealmaking in 2022 for O&G should see companies considering these trends to influence their capital and investment decisions and operations to continue “riding the wave” of growth in O&G and across energy throughout the New Year.
About the author: Seenu Akunuri is PwC’s U.S. Energy, Utilities and Mining Deals leader, where he consults with both audit and non-audit clients on valuation trends, hot topics and industry issues.
With 20 years of worldwide business valuation experience, Seenu has built a solid reputation for solving complex valuation issues around mergers, acquisitions, divestitures and other domestic, global and cross-border transactions.
