No Shortage Of Action For Energy Deal-Makers In 2023

Law360 (December 8, 2023, 10:59 AM EST) -- A fresh wave of oil and gas industry consolidation, stiff macroeconomic headwinds for renewable energy development and the Inflation Reduction Act's growing influence are just some of the highlights of what's been an eventful 2023 for energy sector deal-makers.

Here are the transactional trends that stood out to energy attorneys this year, as well as how they expect those trends to carry over into next year:

Two Oil and Gas Megadeals Herald Fresh Consolidation Push

Oil and gas deal activity began in 2023 much as it had finished in 2022 — sluggishly. But deal activity picked up as the year progressed and hit high gear with a pair of megamergers involving two members of Big Oil.

In early October, ExxonMobil Corp. agreed to buy Permian Basin drilling giant Pioneer Natural Resources in an all-stock deal worth roughly $59.5 billion. Just weeks later, Chevron Corp. agreed to buy Hess Corp. in a $53 billion all-stock deal.

Attorneys say the deals aren't only a bet on the long-term future for U.S. oil and gas, but also a bet on the most lucrative places to drill for it. In acquiring Pioneer, Exxon said it would more than double its production in the oil-rich Permian, which stretches from Texas to New Mexico, while Chevron's purchase of Hess further boosts its operations in the Permian as well as the Denver-Julesburg Basin in Colorado after it paid $7.6 billion for Permian and Denver-Julesburg driller PDC Energy Inc. in May.

"There's just more and more competition for the best areas, the best parts of the best basins," Eric Otness, who heads the mergers and acquisitions and corporate group in Skadden Arps Slate Meagher & Flom LLP's Houston office, said.

That narrower focus will likely drive up sale prices in those areas, attorneys say.

"Finding acreage and assets in those areas is going to be more difficult unless you're willing to pay top dollar for it," Dykema Gossett PLLC member Megan Knell, who focuses on oil and gas transactions, said.

And while it's tempting to view megadeals like Exxon-Pioneer and Chevron-Hess as one-offs, the scarcity value of remaining independent drillers and the growing need for smaller companies to partner up to remain competitive point the way to more mergers in 2024, Wes Williams, who co-heads Akin Gump Strauss Hauer & Feld LLP's energy practice, said.

"They may not be as large, but you'll continue to see more consolidation, probably with more midsize public companies," Williams said.

Attorneys say they'll also be watching to see if upstream consolidation has a ripple effect downstream, including oilfield service and infrastructure companies.

"Some of these companies are going to be sitting there and asking themselves if they need to get bigger in order to accommodate these bigger upstream customers," Kirkland & Ellis LLP partner Shubi Arora said.

LNG and Low-Carbon Projects Find Financial Footing

Oil and gas deal making wasn't limited to upstream mergers this year, as companies sunk billions into project-related acquisition and development, led by liquefied natural gas.

Among the LNG projects that made final investment decisions to move ahead this year were Sempra's $13 billion Port Arthur LNG project — which included $6.8 billion of debt financing — and NextDecade's $12 billion Rio Grande project.

"LNG deals were a significant financing and M&A story in 2023," Kirkland debt finance partner Rohit Chaudhry said. "Some of these deals were so large that they ended up with liquidity constraints in the commercial bank market and had to seek other sources of capital."

Oil and gas companies also opened their wallets for low-carbon technologies as they eye a piece of the global energy transition. Among the notable deals was Exxon in July paying $4.9 billion for carbon capture and storage firm Denbury Inc.

"I expect that to continue, especially as the market gets their arms around what the Inflation Reduction Act really means, or when new Treasury regulations come out," Breen Haire, who co-heads Simpson Thacher & Bartlett LLP's energy and infrastructure practice, said.

Other low-carbon technologies that dollars flowed into this year included renewable natural gas, hydrogen and ammonia. But attorneys say the deal volume in those areas has been slowed by persistent concerns over project development costs, even with economic perks contained in the Inflation Reduction Act and Infrastructure Investment and Jobs Act.

"I think there will be delays, because projects need to space out a little bit to access materials at a reasonable cost, or the costs will go up and we'll need a green premium there," Jason Bennett, who heads Baker Botts LLP's global projects practice, said. "The question is: who's going to absorb that cost, or can we delay it, and how far can you delay it? The cost pressure is real."

Power Sector Provides Plenty of Deal-Making Juice

Deal making in the power and utility sector was pretty steady throughout 2023, with electricity generation projects and transmission and distribution systems changing hands.

American Electric Power in February agreed to sell its unregulated renewable energy business to a consortium of investors, including Blackstone Inc., power developer Invenergy and Canadian firm CDPQ, for $1.5 billion. Duke Energy Corp. in June agreed to sell its unregulated commercial renewable energy business to Brookfield Renewable for approximately $2.8 billion.

Independent power producer Vistra Corp. in March bought Energy Harbor in an approximately $6.7 billion cash-and-debt deal. Midwest utility NiSource in June agreed to sell a stake in its electric and gas distribution company Nipsco for $2.15 billion to Blackstone Infrastructure Partners, while pipeline giant Enbridge in September agreed to buy three Dominion Energy gas utilities for a combined $14 billion.

Additional sales of minority stakes in utilities could be something to watch for in 2024, Morgan Lewis & Bockius LLP partner Mike Espinoza, who focuses on power sector transactions, said.

"I'm curious to see if they can find more targets for this to work," Espinoza said. "Something that all of these sales have in common is not needing state approval. I've seen people predict that this is a great way to raise capital."

A Rocky Year for Renewables

It's been a challenging year for clean energy deal making, as developers and investors faced persistent inflation, higher interest rates and supply chain issues that drove up project costs, and grid interconnection delays that helped stretch out project timelines.

"The first half of the year, most of my time was spent restructuring projects that had problems — underwater power purchase agreements or contracts that needed to get reformulated," McDermott Will & Emery LLP partner Chris Gladbach said.

While some project deals have been successfully renegotiated, attorneys say developers also showed increased willingness to walk away from projects that were no longer economically viable. Nowhere was that more apparent than in offshore wind, where Orsted pulled the plug on its Ocean Wind project in New Jersey.

Renewable energy project customers have also exercised more leverage with developers that are seeking more favorable terms, Foley & Lardner LLP partner Kyle Hayes, who focuses on renewable energy M&A and project development, said.

"There's a lot more diligence being done by offtakers," Hayes said. "Project developers are increasingly willing to share more of the details in terms of the actual project development, understanding that offtakers are a bit more needy."

And attorneys say clean energy M&A ramped up as the year progressed, especially as companies implemented Inflation Reduction Act guidance from the U.S. Department of the Treasury. In addition to the AEP and Duke renewable portfolio sales, energy storage garnered plenty of suitors, highlighted by Engie SA's $1 billion-plus purchase of private equity-backed Broad Reach Power in August.

"To see a big trade like that, and other deals ... we're seeing a ton of investment in the space, and people being able to raise capital at the platform level," Troutman Pepper partner John Leonti said.

Finding dedicated capital sources will be crucial for clean energy developers heading into next year, especially if high interest rates continue to put cost pressure on projects.

"It's becoming harder and harder for developers who don't have long-term relationships with development capital to remain in business," Gladbach said.

Tax Credit Transfer Deals Highlight IRA's Promise

Clean energy developers have spent the year implementing Treasury guidance on how to tap the Inflation Reduction Act's bevy of tax credit and manufacturing incentives, with the belief that those long-term perks outweigh any short-term macroeconomic headwinds.

That includes the June issuance of guidance on the Inflation Reduction Act's so-called transferability provisions, which cover 11 new or expanded energy tax credits and are considered the most transformative piece of the law.

Transferability allows clean energy developers to transfer federal tax credits to others in exchange for cash, and it's greatly expanding the pool of would-be buyers and sellers beyond those found in traditional tax equity that has historically fueled renewable development.

Publicly announced transfer deals include Invenergy's August sale of $580 million worth of credits to Bank of America as part of Invenergy's $1.5 billion purchase of a portfolio of wind and solar farms, Avangrid Inc.'s August transfer of $100 million worth of credits covering several of its wind farms to Vitol Inc., and Israeli developer Ashtrom Renewable Energy selling $300 million worth of credits for its soon-to-be-completed solar farm in Texas to an unnamed buyer in October.

"The path that is unique is that your partner in a tax equity structure is someone who doesn't have a tax appetite, but are actively looking to sell the tax credits to another party that has the tax appetite," Chaudhry of Kirkland said.

Attorneys are predicting even more transfer activity in 2024, with buyers and sellers finding novel ways to make deals.

"We're seeing some transactions that would view the tax credits as currency," Ike Emehelu, who co-heads Akin's projects and energy transition practice, said. "You make an offer to buy the asset and part of the price includes the value of the transfer."

--Additional reporting by Al Barbarino, Jade Martinez-Pogue, Hailey Konnath, Kat Lucero, Lauren Berg and George Woolston. Editing by Orlando Lorenzo and Alyssa Miller.

Correction: An earlier version of this story misstated an attorney's title. The error has been corrected.

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