Cautious optimism: Q4’22 M&A trends in Energy and Chemicals

The Russia-Ukraine war, interest rate increases by the Federal Reserve, volatility in energy markets, and continued supply chain disruptions led to a dramatic Y-o-Y decline in 2022 for M&A transactions in the engergy and chemicals sector. Deal volume fell 23 percent and deal value dropped 51 percent.

KPMG Economics expects a mild recession in the first half of 2023 as the Federal Reserve continues to combat high inflation by tightening financial conditions; the federal funds rate is expected to peak at 5.25%. The outlook is expected to improve later in the year as consumer spending rebounds.

Despite a general softening of M&A markets across the energy and chemicals sector, M&A deals will likely increase in H2'23. For deal makers in the energy industry, the cost of capital might play a bigger role in 2023 as lenders come back to the market. In the renewables subsector, the benefits of the Inflation Reduction Act (IRA) are just starting to trickle into the marketplace and will likely accelerate throughout 2023. In the chemicals industry, dealmakers will continue to look for opportunities in support of growth priorities and ESG, but deal activity is likely to be subdued as long as capital markets remain challenged.

Current volatility in the commodity price environment and macroeconomic uncertainty around interest rates and inflation have all made getting deals done a bit more difficult. However, assets are available and deals are out there to be made.

Dealmakers should consider the following requirements to help support value in 2023:

• Both buyers and sellers will need to define an outlook three, five, and 10 years ahead and adapt to where they see the market headed.
• Companies need to effectively understand and articulate their actual run rate and develop a realistic valuation of their business.
• Deal makers will need to be flexible and react quickly to what will most likely be a fluid M&A market in 2023.