The Russian War has been at the forefront of Commodity news for a while, but most coverage has been focused on the short-term supply disruption caused in commodity markets. As the picture for supply in a post-Russian war world becomes clear, the longer-term horizon for many of these commodities becomes more compelling.
What’s interesting now, is how both companies and countries are preparing themselves for this world through their M&A strategies.
Gauging the commodity market before the war was a relatively straightforward (ha) exercise in navigating countless layers of details in determining global supply and demand. But now, the lessons of the 1970s oil embargoes have again hit most of the world. The global commodity markets are now anything but straightforward, as they are hidden behind layers of geopolitics that we haven’t had to consider in a major way for the past few decades. Chiefly, Western countries have once again concluded that they have to be self-reliant, or at least reliant on partners they can fully trust. The policies that Western governments have recently structured have changed the M&A strategies of energy companies across verticals and countries.
Let’s start this story of M&A with the most important commodity: liquid gold…
Oil & Gas
Domestic M&A for Oil and Gas has taken a hit post-war, with a record low number of transactions (since 2005), and deal value was 13% lower year over year (Enverus). This can be explained by rising interest rates capping the knees of smaller E&Ps who were unable to engage in any meaningful deal flow. Deal flow was instead dominated by larger firms who used their size to scoop up premium acreage, mainly in the Permian and Eagle Ford, with the rich (Diamondback-Lario/Firebird, Marathon-Ensign) getting richer by adding onto their 10+ year reserves. The smaller E&Ps are getting more desperate, and 2023 will be a year of high-volume, low-value deals, with a focus on mergers of equals, and deal flow in non-premium basins as smaller E&Ps try to replenish inventories. Nat-gas-focused deals will struggle with commodity price volatility, especially with the recent plummet in prices. While Freeport coming fully online will help stabilize prices, the outlook for the first half of 2023 looks difficult for natural gas M&A.
Internationally, there are a few trends worth keeping an eye on. First, is a focus on heavier oil as US refineries lost sources of heavy crude from Russia and other sanctioned countries. The recent reversal of Venezuelan sanctions (allowing Chevron a few cargoes) was born at least in part due to the scarcity US refiners were facing in sourcing heavy crude. What this means for deal flow is an increased focus on Canadian O&G, as their importance on the global stage grows every year. The Russian war has also reshaped the discussion on offshore rigs. The break-evens are amazing as ever, and the longer payback period is more palatable with the longer runway given to O&G due to the war. Finally, the importance of India as a facilitator in the global market (buying Russian crude, refining, and selling to the West) means more M&A money flowing to assets over there and potentially more activity by companies like BPCL (Bharat Petroleum Corporation Limited) and Reliance in the Western M&A markets.
Agriculture
The scramble for food production centered around wheat scarcity in the early parts of the war, especially with Ukraine’s importance in the wheat supply chain. However, a much more pressing issue now is Phosphate. Phosphate is used in two key items nowadays: Fertilizers and Lithium Phosphate EV Batteries, which have been rapidly growing in market share (from 9 to 30% within 2 years). Fertilizers have been under immense shortages, and with increased competition in the future from EV companies, Phosphate M&A activity will be centered around picking up all Phosphate producers at significant premiums. China (the dominant global producer) even had to restrict phosphate exports to keep enough for domestic demand. Large miners have been rapidly trying to pivot to the new “mining” materials of the future, as seen by the 5.7B potash mine BHP established in Canada. Whether that means buying out the large fertilizer companies or competing with them to buy out smaller miners, M&A activity looks to be ramping up significantly in the space.
Uranium
The largest source of geopolitical risk in the market is Kazakhstan, adding to the list of China and Russia discussed in the other sections. Kazakhstan is around 40% of global uranium production, and as a result, has forced US politicians to once again re-evaluate their exposure and decide to establish a domestic reserve of uranium. This entrance into the market by governments and other metal trusts has led to a significant increase in funding into the sector. The flurry of M&A activity between juniors (comparable to undeveloped upstream producers in O&G) and the developed producers in the space has been in full flow, with the larger players buying up more reserves. This trend should continue as the spot price continues to climb up, allowing for developed producers to come in, buy reserves, and then quickly turn around and use their trusted counterparty status to ink long-term contracts that will allow for the development of those untapped reserves. This includes Cameco buying Westinghouse at a 7.8B valuation and UEC buying UEX — the largest M&A transaction in the US since 2021.
Coal
Coal is in an interesting place with deal flow, as the rise in rates, especially thermal, has allowed for greater interest in the sector, yet it’s set on the backdrop of a dying commodity. The focus in this sector has gone from restructuring to using the piles of cash generated at these rates to buy more long-term assets. At the peak of these rates, Peabody was engaged in discussions to acquire Coronado Global Resources. While investors reacted negatively to the announcement of this deal, and it eventually fell through, clear consolidation in the sector is on the cards as the industry now has the long-term outlook to support a few large coal miners. Met Coal’s rebound in rates has allowed for greater interest in a relatively forgotten portion of the coal industry, as thermal coal used to grab all the headlines. International M&A has led the way in the coal industry, especially with consolidation in both the Indonesian coal industry, such as PT Radhika Janatha Raya acquiring 30% of PT Golden Energy Mines TBK for 420M, and the more traditional Australian coal industry.
Battery & Rare Earth Metals
BHP and Rio Tinto have been very active in searching for M&A deals, especially with the mountains of cash they are sitting on. One of the verticals they have been pivoting towards is battery metals, especially with the hype around electric vehicles. While I mentioned Phosphate as one of these beneficiary commodities, the other more traditional metals (Copper) have been heating up in M&A activity. Deals such as the BHP offer for Oz Minerals Limited, and Rio Tinto’s acquisition of TRQ were done at 50%+ premiums to the stock price.
The re-evaluation of geopolitical ties is not limited to only Russia but extends to China. 90% of the critical rare earth materials used in production for defense, consumer products, and green energy come from China. US Politicians have been incredibly scared about relying on China for these elements, and just over the last year or so, have had a section 232 investigation into Chinese Rare Earth magnets, bills to ban Chinese REEs for defense contractors and establish a strategic stockpile, and gave funding through the USICA bill. For M&A purposes, Chinese consolidation of their Rare Earth businesses was a focus, where they merged 3/6 biggest Chinese companies to increase bargaining power. In the West, there will be a ramp-up in M&A activity to establish a Western supply chain of Rare Earth Materials, focusing on established companies like MP Materials, Lynas, Neo Performance Materials, and Energy Fuels buying synergistic companies. This will include M&A to secure sand inputs and to buy processing facilities, such as Energy Fuels’ acquisition of the Bahia Project in 2022.
Shipping
Why did I push my favorite sector to the depths of this article? Because as much as I hate it, M&A in this space is a bit boring/self-explanatory compared to others. Most of the M&A is focused on individual vessels, rather than companies themselves. The focus is on the orderbook, which is relatively lean for both tankers (clean — refined products & dirty — crude) and dry bulk, but packed for containerships. M&A activity has picked up after the Russian war, as the bump in rates and the better outlook for tankers and dry bulk has allowed for sales of older vessels at competitive prices (like Nordic American Tankers selling off early 2000s Suezmaxes).
Reorganization of vessel flows
The older vessels are also being quietly tucked away for the shadow tanker trade (Asian countries buying tankers to transport Russian oil since western tanker companies do not want to touch that trade directly — outside of a few exceptions). For containerships, the process of new builds includes buying them and leasing them out immediately- However, long-term leases have dried up, and M&A activity looks like it will slow before a flurry of restructuring hits the market. However, Atlas (a containership stock with one of the worst valuations on the market) was purchased at a near 25% premium, so there is still value to be picked up here.
Conclusion
The M&A landscape for commodities has forever changed as a result of the Russian war, as companies and countries re-evaluate the risks posed by China, Russia, and Kazakhstan for the supply of vital commodities. This has led to a scramble for resources that will only continue as countries finalize and push additional funding for these industries. Companies are sitting on a ton of dry powder, especially with metals, and the future for deal flow looks bright.
Econ Ramblings 