Energy mergers are on the up

The uncertainty surrounding the global energy markets is having an effect on the profits of energy providers. With the plummeting price of oil and the renewed confidence in clean energy, many traditional energy providers are being forced to rethink their strategies for the coming years.

Alongside these shifts are the major geopolitical issues that are giving many major energy suppliers cause to look at their long-term strategies. With Russian oil and gas firms suffering from Western-imposed sanctions as a result of the country’s meddling in neighbouring Ukraine, their traditional customers are starting to look at alternative sources of energy. At the same time, OPEC countries – led by Saudi Arabia – are maintaining high production of oil in an effort to ward off any potential surge in influence of US oil and gas suppliers that have sprung up thanks to shale drilling.

With major global energy companies looking at how best to address these factors, some people are arguing 2015 could be the year utility companies start to join forces on a scale not seen for more than a decade.

Dawn of the supermajors
Towards the end of the last century, one of the largest mergers in corporate history was announced, when Exxon joined forces with Mobil in 1999 to create the largest oil company in the world. The deal followed the biggest consolidation in the industry for many decades; largely the result of a dramatic fall in the price of oil. The same year, French giant Total merged with Belgian firm Petrofina. The previous year, BP had merged with Amoco (an offshoot of John D Rockefeller’s Standard Oil) in a deal valuing the new company at $110bn.

After the ExxonMobil deal, many of the remaining so-called ‘supermajors’ that dominated production looked like they would follow suit and buy up other companies in order to stay competitive: Chevron acquired Texaco in 2001, while both BP and Total SA bought firms to consolidate their positions. These mergers didn’t just reshape the energy markets: they rearranged the list of the world’s largest companies.

Consolidation 2015
As the price of oil has collapsed over the last six months – thanks in large part to Saudi Arabia’s insistence on sustaining its high levels of production – major energy companies have had to take a long look at where their futures lie. Many observers are speculating the result of a falling oil price and an increase in the efficiency of renewable energies such as solar power could result in a dramatic reshaping of the energy markets.

While it seems unlikely there will be any mergers on the scale seen at the end of the last century, a number of firms are looking at tie-ups that will give them increased sway in the marketplace. Last year, it was announced Exelon Corporation, the US electric, gas and nuclear firm, would be acquiring electricity service company Pepco Holdings for around $6.8bn. The deal, however, has faced considerable opposition from shareholders of both firms, as well as regulators concerned by the lack of competition in the domestic electricity market.

Another deal set to shake up the US energy market is the proposed merger of two renewable firms: NextEra Energy and Hawaiian Electric Industries. The deal, announced at the end of last year and valued at around $4.3bn, will see the two companies combine their renewable energy operations into a firm that can lead the industry. It is undoubtedly an attractive proposition for both firms, who will benefit from each other’s skill sets and added leverage in the market.

According to Jim Robo, CEO of NextEra Energy, the deal to join forces with Hawaiian Electric Industries will help create a more affordable clean energy service for consumers. He said: “This announcement marks an important milestone for both our companies as we seek to leverage our respective strengths, commitments to our customers and the communities we serve, and the mutual goal of building a cleaner energy future. We are proud that Hawaiian Electric has agreed to join our company in large part because of our shared vision to bring cleaner, renewable energy to Hawaii, while at the same time helping to reduce energy costs for Hawaiian Electric’s customers.”

Robo added: “You can think about Hawaii as a postcard from the future of what’s going to happen in the electric industry in the United States. As renewable generation becomes cheaper, and as electric storage becomes more efficient and possible, all electric utilities are going to have to face this.”

According to reports in the Financial Times, China could be about to merge two of its state-owned oil companies into a vast oil supermajor it hopes will compete on the global stage. The two firms (CNPC, the parent company of PetroChina, and Sinopec) would create a unified business that would dominate China’s on-field oil operations, as well as its refineries, pipeline network and gas stations. Observers believe that, if China is to play a major role in the international energy markets, these two firms will need to merge. Xiamen University’s Lin Boquiang, an expert in the energy markets, told the Financial Times: “It all depends on strategy. If the future direction is international then it is better to merge, but if the primary market is still domestic then it is better to stay separate.”

However, the two firms were originally split off from the Ministry of Petroleum in order to create competition in China’s oil markets. While that may have served a purpose as China invested domestically over the last decade or so, the new outward-looking strategy will require consolidation. According to the Financial Times, the country’s two nuclear power market leaders (CNNC and China General Nuclear) are reportedly to meet a similar fate.

Pick and choose
While some firms have been consolidating, others have sought to divest parts of their operations in order to focus on specific areas. Germany’s biggest utility company, E.ON, (also one of the ‘Big Six’ energy companies in the UK) announced at the end of November that it would be selling off its fossil fuel business. This included its coal, gas, hydro and nuclear power operations, which would be split off into a new company. Instead, the firm will refocus its attention on renewables.

The strategy reflects the shifting state of the energy market: where others are consolidating in order to gain an upper hand over smaller rivals, companies such as E.ON are realising they need to pick and choose which of their operations they’re going to focus on in the future.

Whether all these mergers and acquisitions or divestments signal what to expect during the coming 12 months in the global energy markets remains to be seen. With oil prices falling around the globe and geopolitical conflicts forcing many firms to reassess operations in certain parts of the world, the world’s energy markets may look considerably different in a year’s time.