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Taking Stock of Chemical Sector M&A Through Energy for 2012

By John V

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Published: 04Mar2012
Word count: 733
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When economic uncertainty looms and threatens to undercut all chemical sector M&A activity, primarily by undermining CEO confidence, it's always good to examine basic stalwarts and how they should behave in the near future. The energy sector is one such source of strength and its behavior has direct bearing on what we can predict for chemical sector mergers and acquisitions. There are at least three points worth discussing in this regard: first, China and its continued appetite for energy resources; second, the role of biofuels and other potential alternate energy sources; third, the general outlook for energy as a sector based on 2011 and other factors.

First, consider the simplest of these three points. Energy sector M&A activity in 2011 was healthy, but some experts and energy investors predict it may actually increase in 2012, far outpacing deal activity in other subsectors. This is due in part to the continued increase in demand for oil, coal, and gas in China, and partly because prices for many types of fuel and midstream production products didn't grow as much as normal due to a variety of odd factors. Coupled with concerns about solar-power as an investment target due to the oversupply of lithium and the difficulties that corn-based fuels may face as subsidies in the United States finally wind down, this means that traditional energy suppliers will be relatively more valuable in 2012, and suggests energy assets will remain important for chemical sector M&A.

Despite ongoing difficulties, both deserved and those put in place by entrenched interests, biofuels and other alternative and renewable energy sources are certainly not out of the energy game nor the sphere of important developments for chemicals M&A, both for their viability as a product and how they could impact other chemicals processes that matter. The 2008 and pending economic downturns have done their part in supplying further motivation to develop new fuel sources. Although natural gas prices have not increased much, petroleum prices continue to climb. People and companies obviously need to find ways to decrease prices during the recession, and this need creates opportunities for valuable investments in alternative energy and biofuels.

Secondly, many alternate and renewable energy options are "known quantities." Finally making one viable as a major replacement will not require an original idea that starts from scratch, but rather will be the result of accrued incremental gains. Investing in the product of one of these costs less and has less risk - so each time the incentives to improve such a fuel source increase, the reality gets a little closer to the goal. After almost a decade of dedicated research by major companies, these technologies are a mainstay of chemical sector M&A and their chance to succeed at a game-changing level only gets better. Lastly, the increasing importance of China in the global economy and its continued feverish growth put more environmental pressure to reduce our reliance on fossil fuels. Until other energy sources become more cost efficient, major players in emerging economies will have little incentive to make the change, despite the fact that their economies may be in a better position to do so.

Speaking of Chinese energy demands, Sino industry's insatiable appetite for every viable fuel source has recently led to situations where Chinese investors are seeking more control and closer access to the collection and refining of energy resources. The need to secure fuel to meet its need, coupled with the fact that 2008 left many Chinese companies with cash on hand and interested in chemicals M&A deals targeting desirous of European assets have fueled interesting shifts in the sector. For example, in the last quarter, Sinopec purchased a third of U.S. Devon Energy's interest in five oil or gas fields for $2.2 billion, while Sinopec Group got 30 percent of Galp Brazil Services from Portuguese Galp Energia SGPA SA for $3.54 billion.

The energy sector and chemical M&A in general look different in the start of 2012 than many thought they would even six months ago. Despite the uncertainty wrought in part by the tremors roiling out of Western Europe, important trends and obvious features of the global energy industry offer advisors and investors a sounding line to at least test the waters and find something less murky that they can expect for the next few quarters of chemical sector M&A activity.

Based on energy sector activity in 2012, chemical sector looking to energy deals for M&A predictions.

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