CDI Global

Energy Industry in Flux - Opportunities Everywhere

The need for more energy options is abundantly clear with each passing year.  Supporting global growth, as well as the need for affordable fuels to lift billions of people from poverty, are colliding with concerns about global climate change.  This growth needs to produce opportunities not only in alternative energy production with solar, wind, and nuclear, but also in traditional fossil fuels with natural gas, oil, and even coal. 

FOSSIL FUELS

Oil prices, which follow energy supply and demand, decreased from $100/barrel (bbl) in 2015 to below $20/bbl in 2020, and are now around $65/bbl in September 2021.  So much for commodity pricing being boring!  However, we have endured a COVID pandemic and a rare freeze in the Houston Oil & Gas area. Last month a Category 4 Hurricane crashed through the Gulf of Mexico with over one hundred oil rigs shut down; and, Louisiana with almost all Refineries and Ports shut down, further added to the shortage of fossil fuels. With that as a backdrop, Energy may be a commodity, but are these Economic, Technological, or Political issues?

When Joe Biden became US President in early 2021, he canceled the Keystone XL Pipeline, which was designed to deliver 830 thousand bbl/day of crude oil from the Canadian Oil Sands to US refineries, as a step to eliminate fossil fuels and reduce carbon emissions.  This oil will now be exported to Asia.  In March 2021, he eliminated sanctions imposed by his predecessor to enable the Nord Stream 2 project to be completed, a twin underwater pipeline to transport easy access, and low-cost Russian natural gas directly to Germany.

When gasoline prices began to skyrocket this year, he asked OPEC to produce more oil.  What is the US Energy Strategy?

Hedge funds and shareholders recently ousted 3 Exxon Mobil board members in a climate proxy battle; and, America’s big banks have refused to finance oil projects in ANWR.  However, Russia is spending billions of dollars on coal mine and railroad upgrades, to boost coal exports, as are producers in China, South Africa, and India.

ALTERNATIVE ENERGY

In early August, the United Nations Intergovernmental Panel on Climate Change (IPCC) reported “it is unequivocal that human influence has warmed the atmosphere, ocean, and land.”  The report says the Earth has warmed 1.1 degrees C since the last half of the 19th century and the best estimate is a 1.5-degree forecast increase by 2040. 

Most everyone agrees that humans are contributing to climate change through the introduction of greenhouse gases to the atmosphere, caused in part by burning fossil fuels; and, actions should be taken to mitigate this situation. 

The European Commission approved a $6.7 billion plan to support renewable power generation from small solar installations in France as part of its goal to produce one-third of its energy needs from renewable sources by 2030. The US Department of Energy according to Reuters recently outlined additional legislative changes to dramatically increase solar mix from today’s 3% to 40% by 2035.  Similar forecast increases for producing large-scale onshore and offshore wind projects have also been made.

Although alternative energies like solar, wind, and other newer technologies are more environmentally friendly, with current technologies including electricity storage limitations, such a large and rapid conversion to alternatives may neither be technologically practical nor economically feasible at this time. There are also complex and lengthy permitting processes, subpar power transmission infrastructure, and a lack of production facilities, which could adversely influence achieving those objectives.

However, many new Private Equity and Mutual Funds are geared to investing in green energy; but, very few in investing in fossil fuel energy, even though fossil fuels will probably remain the backbone for electricity generation in the near term.

What does all this mean for the M&A market? Acquisitions, Divestitures and Capital Financing opportunities are being generated worldwide.

  1. Acquisitions in the alternative or green energy field including the manufacture, construction, operation, and storage of energy from wind, solar, and other renewable projects are commanding high multiples frequently above 15 times EBITDA based on the anticipated forecast growth of these technologies and markets. 
  2. Fossil fuel-related energy projects including oil and gas exploration, drilling, production, servicing, and even related functions like fracking chemical companies are having difficulty in finding financing for these relatively low growth but undervalued businesses commanding only single-digit acquisition multiples of EBITDA.  “U.S drillers are dying on the vine as PE funding dries up”.
  3. Pipeline, transportation, and infrastructure companies, which are operated like utilities, are considered boring to the financial markets, even though huge investments are being made in these areas. For example, Port Fourchon in Louisiana, which accounts for almost one-fifth of US oil imports and exports, was shut down during Hurricane IDA and will need significant new investments.
  4. There are interesting opportunities in today’s transition to renewable energy including emerging technologies like battery storage, carbon capture, or generating energy from Hydrogen.

All of these areas may offer attractive acquisition opportunities.

CDI Global can assist in buying, or selling energy-related businesses since this has been an area of our expertise for decades.  We are currently participating in several alternative energy, fracking chemical, and even artificial intelligence businesses, related to the Energy Market.

By Rick Sommer

About the author: The author Rick Sommer is a former executive with Exxon, CEA (an Energy & Environmental Company), a former Board Member within the International Energy Agency, and is the former CEO and current Chairman of CDI Global.

Sources:

  • NY Post Opinion August 14, 2021
  • Wall Street Journal Opinion June 10, 2021
  • Wall Street Journal Opinion June 10, 2021
  • Orion Energy Partners Newsletter September 2, 2021
  • Thomas Newsletter August 19, 2021 by Mike Hockett
  • S&P Capital IQ, and Equidam EBITDA Multiples by Industry 2020/21 Data
  • Seeking Alpha April 16, 2021 by Carl Surran
  • Port Facts Greater Lafourchette Port Commission August 30, 2021
  • JP Morgan Private Bank June 10, 2021 report On Investing in the Transition to Clean Energy

 

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