Podcast: How Are European Energy and Mining Companies Transitioning To a Greener Future

Join this discussion to learn how ESG factors are impacting fossil fuel energy companies

Patrick Harris, head of energy and natural resources for Mergermarket and Dealreporter, joins Julie-Anna Needham to discuss how environmental or ESG factors are impacting energy companies traditionally focused on fossil fuels. Dealcast is presented by Mergermarket and SS&C Intralinks.

In this podcast, you’ll hear about:

• Where major energy and mining companies are in their transition away from fossil fuels.
• How these companies are looking to achieve this transition to cleaner energy
• Why oil majors will have to continually think about creative solutions.

Transcript

[MUSIC PLAYING] JULIE-ANNA NEEDHAM: Welcome to Dealcast, the weekly M&A podcast presented to you by Mergermarket and SS&C Intralinks. I'm Julie-Anna Needham. In this week's episode, we're looking at how environmental, or ESG factors, are impacting energy companies traditionally focused on fossil fuels. I'm joined by Patrick Harris, head of energy and natural resources for Mergermarket and Dealreporter. Hi, Patrick.

PATRICK HARRIS: Hi, Julie-Anna.

JULIE-ANNA NEEDHAM: To begin with, can you start by giving us the big picture of where major energy and mining companies are in their transition away from fossil fuels, focusing specifically on the European ones?

PATRICK HARRIS: Well, I think it's fair to say that the European energy majors are on the front foot in terms of the energy transition and climate awareness. I think that one clear way to demonstrate that is the fact that I just called them energy majors, and not oil majors. Worse thing to do these days is to call an oil and gas company an oil and gas company. You have, for instance, BP for example, has out very wide-ranging objectives to reach net-zero 50 gigawatts of renewable energy power generation they want to have under their umbrella by 2030. That's a gigantic amount of renewable power that they have an ambition to achieve. Then you've got Total, who wants to get to net-zero by 2050. You've got Shell, which is investing along the value chain.

So these guys are really making headway on the energy transition. Then you've got the mining majors as well, which, they've got kind of a dual approach to climate awareness. On the one hand, many of them have large coal portfolios, BHP, Glencore, Anglo American, and investors. For investors, coal is taboo. That's the-- it's poison. You don't put the word coal in any investor presentation. So they need to find a way of transitioning away from those. But also, there's an opportunity for those guys in terms of the materials and the metals that will be used in electric vehicles, in power generation, things like copper, obviously nickel, cobalt, as well as the rare earths.

So there's a lot of opportunity for those guys as well. And there's opportunities for the oil majors, as they transition. They're going to be looking at new asset classes. They are already. So in terms of the big picture, it's very mixed. Even within say the oil majors themselves, they each have very different strategies. Some might be actually going, looking to acquire, or to develop greenfield power generation, offshore wind, solar. Whilst other ones, say Shell, for example, is heavily investing on the value chain. You'll see on the TV now, there's adverts for Shell Renewable Energy, which is a home supplier of green energy. That these guys want to-- they're looking to replace the petrol you're putting into the pump with other ways of touching the customer, whether or not that's through EV charging, whether that's through your bill at home. And it's about gas and it's about electricity, that's why they want to be energy majors, not oil majors anymore.

JULIE-ANNA NEEDHAM: Great, thank you. Well, you touched on some of it in your answer there, but how are they looking to achieve this transition to cleaner energy?

PATRICK HARRIS: Yeah, so it's pretty classic, really. They're going to sell the things that are high carbon, and they're going to buy things that are low carbon. So if we look first about the investments they're going to make, we've already seen that example of Shell, for example. That Shell, that customer-focused business, that comes from First Utility, which it acquired a number of years ago. Total has bought Direct Energy in France.

So these are large acquisitions they're doing to shift where the cash flow comes from and their customer base. So they're doing that on the value chain side, but then there's also the power generation side. These guys are unlikely to want to compete against long-term investors to acquire brownfield energy assets because the cost of capital that these guys can employ and the multiples on those acquisitions are huge.

So in terms of how they're going to grow these portfolios of power generation, a lot of it will probably be greenfield investments, tendering into government auction rounds, and also through joint ventures with people established in the space. If we look at BP as a good example, it has its joint-- well, it invested into a business called Lightsource a number of years ago, which is now Lightsource BP. And it uses that as its vehicle to grow in the renewable space. Total has similarly done the same in Iberia, invested in Eren, a business there, and it's very active in the acquisition space in, say, Portugal. Whereas often Total Eren is often a bid on assets there.

So that's how they're looking to shift, to add new asset classes along the value chain. With some creative financial wizardry, they can compete against those long-term investors, they can compete against the traditional utilities, and other independent power producers to enter that space. Because after all, in the long run, it could be argued that energy majors, or oil majors, are actually better positioned to own these assets, these large power generation assets, than the present incumbents because it's the energy majors that know how to handle commodity price fluctuation. This is what these power generation assets will become the subject of once tariffs and subsidies fall away. And also, it's these guys that know how to manage large Capex projects offshore, and in far-flung destinations. So one could argue that actually, they're the natural home for these assets in the long run.

The hard bit, in terms of achieving transition, is divesting the high-carbon assets. And obviously, as you know very well, Julie-Anna, because we both used to cover this space, the oil majors and mining majors, they have portfolio rotation programs that happen every-- over a series of a few years, that's always gone on, they mature assets, those that they don't see the value of, they'll put into a package and they'll sell. That has a very different flavor these days, in terms of if we-- say, if we look at BP again. If we look at the objectives it set out last year, it wants to reduce its production by 40%. That is a lot of assets to come into the market, and it means that whereas in the past, when an oil major was high grading its portfolio, it would be looking at the life of the fields, it would be looking at their cost, it would be looking at how peripheral they are in terms of the rest of the portfolio.

A new factor, and one of the major factors in that now will be their carbon intensity. So there could be some assets that are very high cash flow, very low cost, but which are very high carbon. And they will have to sell them anyway, even though in the past, they don't hold onto those assets.

So there could be some really attractive assets that come out of them. But the problem is, as I said, is how they can sell these because they might not want them. There aren't many others that want them either, especially not in the public markets. There's very few-- there are no listed companies, apart from maybe the Americans, that will still pick up these assets, high carbon assets.

So it becomes a question of who? You look at private equity as well, traditionally, they are the ones that have picked up some of these assets in the North Sea, we've got very large private equity-backed vehicles, with the exception now of Chrysaor, or Harbor Energy, as it is now, very few of those have seen very successful exits. So private equity as well is kind of a bit more cautious about oil and gas. So that area, or that biopool, is shrinking. Then you've got sovereign wealth fund-backed companies, are private, but not private equity companies that might pick these up, but it's difficult.

So doing that to all these disposals. So the oil majors will have to maybe think about, again, creative solutions. Do they bundle these assets together? Sell them as one even larger package, create subsidiaries, spinning them off, carving them out, IPO-ing them. That could be difficult, but they might be the ways to achieve the real transformative quantum of transformation that they need to achieve to it, they need to enact to achieve the transformation that they've set out.

JULIE-ANNA NEEDHAM: Great. Thanks very much, Patrick.

That was Patrick Harris, head of energy and natural resources for Mergermarket and Dealreporter. Thank you for listening to this week's episode of Dealcast, presented by Mergermarket and SS&C Intralinks. Please rate, review, and follow the podcast. You can find us on Apple Podcasts, Spotify, or look out for your Mergermarket news alert. For more information, check out our show notes. Join us next week for another episode.