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Tariq Siddiqui's picture
COO Upstream EP Advisors LLC

Oil & Energy | Business Development | Capital Projects | Offshore Wind -  Proven leader in offshore development and operations, with 25+ years’ expertise in managing business through cycles...

  • Member since 2021
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  • Feb 3, 2021
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TRANSITION & TRANSFORMATION DRIVING THE M&A

The climate change targets are driving up the M&A activities in USA & globally. The trends are showing that investors are increasingly concerned with traditional energy investment opportunities that may pose significant risk to there portfolios. The governments are increasingly giving more incentives to the cleaner and greener energy solution forcing all sorts of investors to renewables. This includes strategic investors like utility companies as well as oil & gas companies that are tactical investors playing wait and see game before committing fully on any given technology and are holding a diversified portfolio of renewable technologies. There are clear drivers for the renewables as well as some challenges and risks. The oil companies have been seriously impacted by these emerging M&A trends, and the valuations have significantly declined. 

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Matt Chester's picture
Matt Chester on Feb 3, 2021

This includes strategic investors like utility companies as well as oil & gas companies that are tactical investors playing wait and see game before committing fully on any given technology and are holding a diversified portfolio of renewable technologies. 

Is this them biding their time, or is it that the future will simply be a status quo of diversified portfolio? Most people would agree there won't be one single silver bullet technology that dominates the energy mix, so it stands to reason that investors wouldn't want to be all in on just one technology, right? 

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Tariq Siddiqui on Feb 3, 2021

Matt
A very good question. The short answer is its bit of both.

The oil & gas companies over the years have maintained a diverse portfolio within fossil fuels. Traditionally, more investment in oil than gas, more investment in light oil vs heavy oil. Focus has been on managing the risk and the return on invested capital (ROIC). Lot of oil companies took their time to de-risk the technologies before committing to it. Offshore deepwater, unconventional are examples.  Many waited on heavy oil technology to pick-up and others only put limited investment and research before divesting it.

Based on this experience and trends, it is clear for a while there will be a diversified portfolio of renewables, as here is no single silver bullet technology. Companies like Royal/Dutch Shell are transitioning towards becoming energy company, delivering diversified mix of fuels. In the absence of clear winner, super majors are investing in low hanging fruit; i.e. low cost renewables, solar PV, onshore wind, EV charging and R&D. There is yet no major commitment to capital intensive, utility scale renewables like offshore wind (OSW), or bio-fuels, Hydrogen or carbon capture storage & utilization (CCSU). 

Over a time, as a result of enterprising partnership and alliance, advances in technology, may give companies a competitive advantage in certain renewable technology in certain markets.

Matt Chester's picture
Matt Chester on Feb 3, 2021

Thanks for the detailed response, Tariq. I think the diversification of various types of oil and gas investments always made sense, especially where the same institutional knowledge/experience/equipment allowed for ease of transfer between them. With a move towards renewables, there's certainly some carry over-- particularly in offshore wind-- that the fossil industries can bring, as well as the development of hydrogen assets, but some of it will be pretty new, won't it? Does that undercut the ease with which they can diversify? Or is that I guess why we're seeing the M&A trends-- because they don't necessarily have that in house? 

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Tariq Siddiqui on Feb 3, 2021

Indeed portfolio diversification will always be there to mange portfolio risk and also to mange market asymmetries.

 Both solar and wind have achieved an earlier breakout from other renewables. Both, in solar and wind there is a significant supply chain and service industry segment that can benefit from oil & gas industry. The obvious examples are development phase/segment, asset operations, operation & maintenance (O&M) and Engineering procurement and Construction (EPC) service. The degree of transferable expertise may vary from 40 to 70 %. But there will always be some areas that indeed will be pretty new.

Degree of M&A in fossil fuel industry has also to do with size, whereas super majors that have value chain as well as diverse portfolios, have on-the balance sheet financing to mange the initial diversification. The independent and middle market company, which forms a large segment may need investment. The investor are only willing to invest in those fossil fuel companies that have credible transition plans. Others will have serious distress.

The great things is there has started a convergence of interest in renewables from majors and super majors, beyond PR. it may still be tactical but it has started. The recent news that XOM and Chevron have considered merging, is a telling sign on he wall. Its, simply not because pandemic.   

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