Natural gas is a volatile substance. The market for it has been explosive this year, as Russia’s war on Ukraine wreaks havoc for Europe’s energy sector. Gas prices are near all-time highs, Germany nixed the Nord Stream 2 pipeline project last month, and governments in the region – which imports 40% of its natural gas from Russia – are considering joining the US in a total embargo on Russian gas.

So far in 2022, this reads across two trends in natural-gas M&A – the first unsurprising, and the second perhaps not. First, dealmakers in the sector are ever less dependent on Russia, continuing a trend that started with Russia’s annexation of Crimea in 2014. This year, Russia ranks just fifth in total value for European natural-gas M&A – a fall from grace for a country that has been one of the top two markets for M&A in the space in nine of the last 13 years, Dealogic data show.

Second, as commodity-price chaos means uncertain asset valuations, deal value is down across Europe. It fell dramatically from when Europe saw EUR 93.6bn spent across 201 deals in 2015, to EUR 22bn spent across 131 deals in 2018. But as commodity prices steadily recovered, deal activity ticked back up in the following years, with EUR 33.6bn spent across 86 deals in 2021. This year, though, the bottom has fallen out; investors have spent a mere EUR 1.9bn across 16 deals.

Mind the gap

In the months ahead, cross-border tie-ups of liquified natural gas (LNG) could be winners as prices stabilise and increased LNG flow from elsewhere plugs the gap left by imports from Russia.

Among last year’s top deals, Aker BP [OSE:AKERBP] merged with Sweden’s Lundin Energy for EUR 9.7bn, and Switzerland’s Vitol and Mercantile & Maritime Energy bought Russia’s Vostok Oil for EUR 3.5bn. Strategic buyers dominated the space, and PE firms did little, except for OTPP’s and Brookfield’s EUR 1.4bn acquisition of British Scotia Gas Networks.

 Other recent cross-border LNG deals include Snam’s [BIT:SRG] purchase of a minority stake in an Algeria-to-Italy pipeline for EUR 385m in November, and Finland-based Gasum’s acquisition of Norway-based Risavika Production for an undisclosed amount that same month.

Power play

As demand for assets picks up, sponsors are ready to make a splash. Carlyle [NYSE:CG], CVC [NYSE:CVC] and CIC-owned Neptune Energy have been in talks with Harbour. However, historically high commodity prices also make an IPO a more attractive option for the target, as reported.

Indeed, public markets may be de rigueur in the space. German chemicals firm BASF [ETR:BAS] will pursue an IPO of Wintershall DEA in 2023, despite Wintershall’s likely loss of EUR 730m on Nord Stream 2, and opposition earlier this year from investor LetterOne.

As Europe’s natural-gas shortage becomes the new normal, investors will give owners of related energy assets every means to cash out. Expect this year’s lull in dealmaking to be the eye of the storm.