Energy M&A deals occur to drive market consolidation, achieve synergies, and gain strategic access to resources and technology, among other reasons. The energy industry encompasses exploration, production, generation, and distribution of various energy sources, vital for society and economic growth.
Sub Sectors include upstream (exploration and production), midstream (refining and processing), downstream (natural gas distribution), renewables, power generation, energy finance, and energy trading.
Our toolset will include the economy module, stock screener module, and comparison analysis module from OpenBB Terminal.
Table of Contents
- 1. Energy Sector Introduction
- 2. M&A Approach for Financial Analysts
- 3. Accessing Financial Data with OpenBB & Target Identification
- 4. Automating M&A Workflow: Creating Energy Routines with OpenBB
- 5. Summary
Energy Sector Introduction
Analyst roles in Industry Coverage specializing in energy will expose an individual to concepts such as energy commodities, political developments, macroeconomics, energy generation, energy distribution, renewable energies, emerging energy technologies and many other interesting topics. In the investment banking world, Industry Coverage roles will often be related to Mergers & Acquisitions (M&A) activities.
What is the Energy Industry?
The energy industry is a multifaceted sector that encompasses the exploration, production, generation, and distribution of various energy sources. Energy is vital for powering societies and driving economic growth, and can give clues as to the health of a society and economy.
Image: "A Comprehensive Overview of Energy Industries and Subsectors"
What are the main Energy Industry Subsectors?
- Oil and Gas Exploration and Production (Upstream): Involves finding and extracting crude oil and natural gas reserves.
- Refining and Processing (Midstream): Refines crude oil and processes natural gas into various products.
- Natural Gas Distribution (Downstream): Distributes natural gas to residential, commercial, and industrial users.
- Renewable Energy: Includes solar, wind, hydro, and other clean energy sources for electricity generation.
- Electricity Generation and Utilities (Power Generation): Focuses on generating and distributing electricity to consumers.
- Energy Finance: Involves buying, selling, and financing energy commodities.
- Energy Trading and Markets: Engages in the trading of energy commodities and related financial instruments.
Additionally; Coal Mining, Nuclear Energy, Geothermal Energy, Smart Grid, Environmental and Emission Control, Energy Research, Alternative Fuel, and Energy Storage are other significant energy-related subsectors.
Impactful Factors in the Energy Industry:
Energy companies are affected by energy consumption levels (individual and industrial), commodity prices, economic cycles, weather phenomenon, policies and regulations, conflict, war, force majeure, emerging energy technologies, demographic shifts and consumer behaviors, as well as other factors.
Here are some of the well-known players in the energy industry's various subsectors:
- NextEra Energy: Renewable Energy
- Cheniere Energy: LNG (Liquid Nat Gas)
- Vistra Corp: Power Generation
- Kinder Morgan: Energy Infrastructure
- Chevron Corp.: Oil & Gas
- Williams Companies: Natural Gas Processing
- Glencore PLC: Energy Trading
- Mercuria: Energy Trading
M&A Approach for Financial Analysts
Let’s first take a look at the Mergers and Acquisitions activities and put them in a logical frame.
- Merger: Two companies combine to form a new entity.
- Acquisition: One company acquires another, which may become a subsidiary.
M&A, in its core, is all about tapping into the synergies between companies (private and/or public). One might need investment while another might have too much cash in its accounts. One might have distribution rights or connections while the other has the operational expertise. Synergy can be summarized as 1+1=10 (or any arbitrary number that's significantly higher than the expected sum -simplified for educational purposes). A patent or technological invention held by an energy company might be yielding that company $20M a year but the same properties might result in billions of dollars of revenue after a parent company acquires the target company with its intellectual properties and uses the new synergies for competitive advantage.
Synergies aren’t limited with intellectual property (technological synergies) or distribution coverage (operational synergies). There can be many other potential synergies between two entities and it’s good to be aware of them. Here is a more exhaustive list of synergies:
- Cost Synergies: Reduction in operating costs or overhead.
- Revenue Synergies: Increased sales or market opportunities.
- Operational Synergies: Improved efficiency in business processes.
- Strategic Synergies: Enhanced competitive position or market reach.
- Cultural Synergies: Integration of corporate cultures.
- Technology Synergies: Combining technological capabilities.
- Talent Synergies: Leveraging the skills and expertise of both teams.
- Risk Mitigation: Reduced exposure to certain risks.
- Financial Synergies: Improved financial performance or profitability.
That being said, before being able to analyze potential synergies (in any industry), we need to understand the Energy sector, its subsectors and the main dynamics within. We already started discussing the main subsectors and important factors and players in the energy sector. In the first part of our tutorial below, we will form a basic overview of the energy industry while in the second part we will move into more complex analysis that can enable IB analysts to discover and analyze Energy Sector synergies more efficiently which can help propel an analyst's career.
M&A deals have unique characteristics based on the industry, type of deal, counterparties involved, regulatory scope and others but most likely all M&A deals will involve the following workflow categories:
M&A Process Flowchart:
- Target Identification Stage: Initial identification of the M&A opportunity.
- Due Diligence: Research and assessment of the target company.
- Valuation: Determine the financial value of the target.
- Negotiation: Negotiate deal terms and conditions.
- Financing: Secure funding for the transaction.
- Regulatory Approval: Obtain necessary approvals from authorities.
- Integration: Merge operations and systems post-acquisition.
- Closing: Finalize the deal and transfer ownership.
- Post-Merger Activities: Implement synergies and monitor performance.
While they are all critical phases, target identification and due diligence can be seen as the most critical parts of the entire M&A deal process as they form and shape the entire process. Below we will start finding meaningful contributions to the initial steps of an M&A activity using smart financial software solutions.
Accessing Financial Data with OpenBB & Target Identificatio
We will approach Industry Coverage from a top down perspective.
We can use the economy module, stock screen module and comparison analysis module from OpenBB Terminal. If you have followed the previous tutorials, you should have learned:
- How to Install and Run OpenBB Finance Terminal
- How to Create Financial Routines and Workflows with OpenBB Terminal (IPO Tasks)
In this tutorial, we will explore a new workflow, automate some of the tasks involved and identify potential targets for M&A deals in the Energy sector.
Economy --> Screener --> Comparison Analysis
Let’s first start the OpenBB Terminal: 
Economy Module for Industry Coverage
Let's look at the beneficial features under the economy module.
/economy/ $ valuation -g utilities
Here is the animation of the command and output:
/economy/ $ valuation -g energy
Here is the animation of the command and output:
In the economy module, we see that Oil & Gas Exploration and Production with Oil & Gas Integrated have $2+ trillion combined market capitalization. On the other hand, Renewables has a $94 billion market capitalization. While some sub sectors might appear small in comparison, they might have more momentum and innovation going on which is usually a healthy indicator for M&A activities. We know the traditional Oil & Gas industry has been established many decades ago with very big market players leading it. Regardless, it’s very nice to be able to get a full picture of various energy sub sectors at the tip of our fingers.
Let’s take a look at S&P 500 Utilities and Energy presets on OpenBB and see what kind of insight we can derive from it.
Stock Screener Module for Target Identification
Now let's look at the stock screener module to uncover further insight in the energy sector.
/stocks/scr/ $ set --preset sp500_utilities_sector/overview
Here is the animation of the command and output:
/stocks/scr/ $ set --preset sp500_energy_sector/overview
Here is the animation of the command and output:
From the screener results, we can see that the Energy Industry has old moguls such as Exxon and Chevron on the top with $429B and $309B MCap respectively, while the Utilities Industry has NextEra Energy on the top with $103B market capitalization. We can see many other public companies in the energy and utilities sectors. It’s a great start to getting to know some of the main stocks in the industry. Another interesting traditional energy stock is WMB (Williams Companies INC) and we can use it as the starting point and discover similar stocks in the energy industry.
It might be good to note that the Utilities Industry is closely related to the Energy Industry and is often considered a subsector of Energy. Different data sources may use different categorizations for industry sectors. In this tutorial we tried to cover both as they are both highly relevant to energy stocks and potential M&A activity in the energy space.
Comparison Analysis Module for M&A Insights
Finally, we can use some of the information we have to dig deeper and put several energy stocks under the financial microscope:
Let's use OpenBB Terminal to uncover the mysteries of this sector a bit more.
/stocks/ load -t WMB / ca / get --source Finviz / overview
We are loading the WMB stock and also using the get --source command to get multiple similar stocks to start forming some opinions about different companies with different performances in the energy field.
/stocks/ load -t WMB / ca / get --source Finnhub / historical --start 2019-01-01
Two energy companies, namely, LNG (Cheniere INC) and TRGP (Targa Resources Corp) seem to have significantly outperformed the other similar stocks since 2019. Especially Cheniere (red line chart on the top) has positively diverged from the rest of the pack.
We can also look at the balance sheet values of all these similar energy stocks with one simple command.
/stocks/ load -t WMB / ca / get --source Finviz / balance
Balance sheet values show that Cheniere INC is sitting on $2.5B cash in their cash account. This seems like a very high cash account value and usually uncommon to see. In Cheniere’s case it seems to arrive from highly successful operations and aggressive growth in recent years.
Some of the available commands under the comparison analysis module are:
- overview
- historical
- income
- cashflow
- balance
- sentiment
- financial
- performance
- ownership
Alternatively, we can get similar stocks from sources such as Finviz, Polygon and Finnhub. To see the selection of available sources we can use the get --source command as below.
/stocks/ca/get --source
We could instantly have a clear map of the entire energy industry and its subsectors using the OpenBB Terminal. You don't need to know deep programming yet the commands required are lots of fun to use and they make you feel savvy and organized.
Covering the energy industry overview, we realized which subsectors were gigantic based on combined market capitalization and which energy subsectors have positive momentum currently. Data obtained from OpenBB Terminal is well-presented and intuitive. When we pick an energy stock from the Screener module and look deeper we could clearly see that there were similar stocks which seemingly significantly outperformed other similar stocks. Realizing some of the companies grew much more aggressively than others in the last couple of years can be a great starting point in the M&A analysis journey. We can conclude that OpenBB Terminal offers meaningful leads for a sophisticated M&A analysis and furthermore its output can be conveniently used in M&A reports and presentations since data tables and charts are presented elegantly.
Having an excessive amount of cash in the balance sheet can be a counterproductive feature for some companies as it will introduce several new risks and prevent the company from ideal tax optimization. Having said that, operational success and a big cash account is a good problem to have. A company like that can be a good candidate for acquiring other companies as well as being acquired by a multinational energy giant. With its multi billion dollar cash account this company can seek ways to acquire other companies in the energy industry to tame some of the competition, hedge its operational risks, acquire new intellectual properties, gain regional distribution rights and broaden its coverage in the national and international markets.
On the other hand, due to its success, this company is clearly thriving in an operational sense and it can be a very interesting option for other well-rooted players in the energy sector even if it's already overvalued. (think Meta's Instagram Acquisition)
Automating M&A Workflow: Creating Energy Routines with OpenBB
We can go further and automate this workflow so it can be applied to multiple stocks effortlessly. Additionally we can create an industry overview workflow with OpenBB which can be applied to other industries as needed. It makes sense to separate two workflows with two different variables at their cores: industry & company. OpenBB routines will automatically execute multiple commands and your screen as well as your cpu might be overcrowded if you add too many items to your workflow. You can see how we created an IPO Analysis Workflow in our previous OpenBB article.
OpenBB routines are generated using the record/stop sequence as below and they can be run using the exe command later. You can save OpenBB routines locally or on cloud on your OpenBB Hub, you can publish them publicly or privately, you can run them directly from the cloud or from your local folder (Usually saved under OpenBBUserData/routines). You can also share OpenBB routines to share your financial workflow with colleagues, professors or classmates and ask them for their feedback or share your inspiration with them. OpenBB routines are a great step for effortless financial automation powered with Python and open source technologies.
Workflow 1: Energy M&A - Industry
record
economy
valuation -g utilities
home
help
economy
valuation -g energy
home
help
stocks
scr
set --preset sp500_utilities_sector
overview
home
help
stocks
scr
set --preset sp500_energy_sector
overview
home
help
stop
Once the routine is recorded, it will be uploaded to your OpenBB Hub automatically. You can download it and run it locally as well as just copy the cloud link and run it with the exe command as below:
exe https://my.openbb.co/u/usag1r/routine/Energy-MA-Industry-by-pyfi
You will get an output of data tables and charts which you can save and use in presentations, emails and reports. Data tables can be saved as CSV files while charts can be saved as both CSV (for the underlying data) and exported as PNG image (chart) files.
For a demonstration of the routine in action check out the animated GIF image in the second routine workflow below.
Workflow 2: Energy M&A - Stock Comparison
record
stocks
load -t WMB
ca
get --source Finnhub
overview
home
help
stocks
load -t WMB
ca
get --source Finnhub
historical --start 2019-01-01
home
help
stocks
load -t WMB
ca
get --source Finnhub
balance
home
help
stocks
load -t WMB
ca
get --source Finnhub
cashflow
home
help
stop
We can conveniently run the routine again with the exe command.
exe https://my.openbb.co/u/usag1r/routine/Energy-MA-Comparison-by-pyfi
Summary
In this Financial Python tutorial, we covered the Energy industry from an M&A perspective. We learned how to operate the open source finance terminal OpenBB to kickstart our M&A analysis and derive insights from the energy industry.
Furthermore, we implemented new ideas to enable automation of our M&A workflow so that in the competitive investment banking world, you can save time and access strategically curated data as fast as possible.
Written by Umut Sagir, MSc Finance
