M&A activity picks up on Aim
With financing hard to come by and share prices under pressure, oil and gas firms on the Alternative Investment Market are ripe for take-overs, writes NJ Watson
MERGERS and acquisitions (MA&) activity among small oil and gas companies is accelerating, as firms struggle to finance their operations. According to Ernst & Young (E&Y), oil and gas firms listed on London's Alternative Investment Market (Aim) raised just £23.6m ($33.9m) in the fourth quarter, compared with £229m in the third quarter and £325m in fourth-quarter 2007.
This worrying trend – the result of tight credit markets, the recession and the low oil price – has continued so far in 2009, with just £1.19m raised by the sector in January. In October, E&Y calculated that 65% of Aim-listed oil and gas companies had less than £10m of cash to spend on existing opportunities or new projects.
All of this has had a devastating effect on share prices. E&Y's latest Oil and gas eye – a quarterly index tracking oil and gas firms on Aim – ended 2008 about 66% lower and the index is little changed over the first quarter. "We have assets that in a reasonable market would be good for a share price of £1, but here we are at £0.13." says Frank Jackson, managing director of Aim-listed Aurelian Oil and Gas.
Financial institutions are looking for four attributes in an oil and gas stock before investing: proved reserves; cash for work programmes; liquidity in the shares; and at least some production. "If you don't have those things, you're dead in the water," says Jackson.
Doors open for distressed deals
Weak share prices, combined with low levels of cash on balance sheets inevitably opens the door for distressed deals, as many firms cannot continue to finance day-to-day operations. In the last quarter of 2008, some industry observes were predicting a significant volume of M&A transactions. But apart from a few opportunistic purchases, such as Edinburgh-based Cairn Energy's £38m purchase of Plectrum Petroleum and Medoil in September, this did not materialise.
According to mergermarket, an independent M&A intelligence service, the volume of European deals in the first quarter dropped by 60% from the year-earlier period and was down by 35% from fourth-quarter 2008. However, the oil and gas sector featured prominently: over 80% of the total value of first-quarter European M&A took place in just two sectors: Energy, Mining & Utilities (58%) and Financial Services (24%), with the former seeing 47 deals, worth a total of $61.8bn.
One of the problems is that many junior firms cannot tie up because they suffer from similar problems. "The problem with consolidation is that if you take two small companies without money and you put them together, you've got a slightly bigger company without money," says Jackson. "If you do a merger, you must be buying someone with cash or someone with assets."
Consolidation began to accelerate in February, with Dana Petroleum's purchase of Canada-based Bow Valley for C$219m ($173m), or C$0.50 a share – significantly lower than the C$6 a share Bow Valley was trading at in July when oil prices were at all-time highs. And after announcing a 52% surge in net profit in 2008, Dana says it "will focus further on M&A opportunities, continuing to seek good-value opportunities in both the exploration and production arenas".
But the shakeout in the industry is working its way through the system and the likely winners in the process, which have access to capital, are coming to the fore.
In early March, the UK's Valiant Petroleum agreed to buy Nor Energy (UK), a subsidiary of privately held Norwegian firm Nor Energy. And a week later, Irish explorer San Leon Energy announced plans to acquire Gold Point Energy for $1.5m. Also in March, Premier Oil unveiled plans to acquire Canadian Oilexco's cash-strapped North Sea affiliate for $0.505bn in a deal to be part-funded by a rights issue.
"This appears to be a great move by Premier – the acquisition effectively buys it new reserves at a cost of just $8.50/b," says Lawrence Poole of Global Insight, a consultancy. "It confirms the view that North Sea oil and gas firms on the edge of financial ruin are being watched by more secure companies waiting to catch assets on the cheap."
Some deals point to increased interest in producers with assets in central and eastern Europe (CEE); San Leon Energy's acquisition of Gold Point Energy came just after the Canadian firm was awarded two additional Polish concessions. Following the gas-supply spat between Russia and Ukraine in January, which cut Russian gas deliveries to Europe, CEE governments are desperate to develop their own energy resources and reduce dependence on Russian imports.
And there is no shortage of rumours and reports of further acquisitions. Premier itself now looks increasingly like a target for medium-sized firms such as Cairn. The firm has apparently drawn down a debt facility of $0.85bn since the start of the year, which, on top of the $161m it raised through a share placement and its existing cash reserves, means Cairn has more than $2bn to spend. And cash-rich BG Group, fresh from its $0.7bn acquisition of Australia's Pure Energy, is also eyeing North Sea producers such as Oranje Nassau.
The return of the majors
The return of the majors provides evidence that the region is an attractive proposition (PE 4/09 p29). At the end of 2008, ExxonMobil struck a deal with Petrom to explore Romania's deep waters. The agreement came just days after the major signed an agreement with Turkey's TPAO to explore two large Black Sea blocks – a deal that marked ExxonMobil's entry to the region.
Meanwhile, Shell has announced its return to the region. It plans to drill its first well in Ukraine this year and is looking for further opportunities in the country. The company is planning 3-D seismic surveys at the Shebelinka gasfield, in the east of the country.
Aurelian's Jackson explains that the majors first came to the CEE region in the early 1990s, as communism collapsed. "Shell had the block we have now in Poland, but they spent the first four years negotiating with the government to change the operating environment. Then all the big stuff started to happen in the Caspian and [western] Siberia, so they dropped everything and ran off to the east chasing the elephants. The little guys stayed and filled the void."