M&A activity bolstered by Asian NOCs
A revival of oil and gas M&A activity is being driven by Asia's NOCs and the pursuit of unconventional-energy assets, writes Ian Lewis
GLOBAL oil and gas sector mergers and acquisitions (M&A) activity is a long way short of the dizzy heights reached in 2008, but there are signs a slow recovery is taking place. Gradually improving financing conditions, the relatively high oil price and the needs of Asian national oil companies (NOCs) and the majors to gain access to reserves are driving the revival.
After a sluggish start to 2010, the gradual increase in deal volume in the second half 2009 has resumed and looks set to continue. "We haven't seen activity return to the peak levels of early 2008, but there has been a recovery in the last couple of months, suggesting liquidity is returning to the marketplace," says Chris Sheehan, director of M&A research at IHS Herold, a research firm.
Momentum for upstream M&A activity has come from well-funded Asian NOCs eager to secure energy supplies for growing domestic economies, and cash-rich international oil companies (IOCs) seeking to bolster reserves through acquisitions and joint ventures. Both types of company will remain highly active in North America, where unconventional plays, such as the Canadian oil sands and US shale gas, have attracted high valuations.
"Asian NOCs have quite an acquisitive appetite and we don't see that slowing down. Outward investment is still an imperative for their governments," says Marc Folladori, a partner at law firm Mayer Brown.
The latest large deal involving China was state-owned Sinopec's $4.65bn April transaction for ConocoPhillips' 9% stake in the Syncrude Canada oil-sands project. The price, which was around 10-15% higher than many in the markets had expected, demonstrated the financial clout of state-backed Chinese oil firms, which are not reliant on commercial lenders to finance acquisitions.
The move follows a series of headline-grabbing deals by Chinese NOCs around the world, including Sinopec's $7bn acquisition of Addax Petroleum – with upstream assets in west Africa and Iraqi Kurdistan – and PetroChina's C$1.9bn ($1.85bn) investment for a 60% stake in two of Athabasca Oil Sands' Canadian projects.
Asian private-sector investors are also making their presence felt in North America and elsewhere. In early April, Reliance Industries, India's largest publicly quoted firm, entered the US shale-gas sector with a $1.7bn investment for a 40% stake in Atlas Energy's Marcellus Shale operations. Again, the price, comprising $340m in cash with $1.36bn in development costs, was seen as good for the seller. The firms have since said they will further expand their Marcellus acreage.
Meanwhile, in February, Mitsui took a 32.5% stake in Anadarko's Marcellus Shale assets for $1.4bn, following fellow Japanese firm Mitsubishi and South Korea's Sumitomo into the sector.
Besides reflecting expectations of rising Asian energy demand, these deals and others reflect the needs of the relatively small, independent pioneers of unconventional plays, which do not have the size and standing to raise the financing needed for project development.
In another example of this trend, BG's financial resources helped secure the April purchase of Common Resources, which holds shale-gas assets in Texas and Louisiana. A 50:50 joint venture between BG and Exco Resources paid $446m for the firm, with Exco's $223m share to be financed by borrowings under its existing credit agreements.
Consolidation and refocusing by larger energy firms because of the economic downturn are also providing M&A opportunities as business conditions improve and credit becomes more freely available. "Debt financing is still slow, but it's improving," says Folladori. "Companies have better access to financing, even if it isn't like it used to be, so they can try to balance their portfolios to be more in line with business plans."
ConocoPhillips has embarked on a $10bn asset sale over the next few years to improve its financial standing – the sale of its Syncrude stake to Sinopec will meet almost half of that target. But the major is also pulling out of high-profile, joint-venture projects in the Middle East, withdrawing from the $10bn Shah sour-gas development in Abu Dhabi (PE 5/10 p25), and the planned $10bn Yanbu export refinery in Saudi Arabia in the last couple of months.
Devon Energy has also been selling assets, as it focuses its activities on North America. BP has been the main beneficiary, buying Devon's assets in Azerbaijan, Brazil and the US Gulf of Mexico (GOM) for $7bn. The deal is seen as positive for BP, giving the major its first acreage in Brazil's deep waters and consolidating its already strong global deep-water position. As part of the deal, Devon took a 50% stake in BP's Kirkby oil-sands project in Canada for $0.5bn plus $150m of BP's capital costs, so both sides can claim the deal meets their objectives.
In April, Devon also agreed to sell shallow-water GOM oil and gas assets to Apache for $1.05bn (see p7). Devon's assets in China are also expected to come up for sale in the near future. But despite the assets sales, there is still talk of Devon as a potential take-over target – the asset restructuring has failed to boost its share price.
Another company realigning its activities is Talisman Energy, which agreed to sell some of its Canadian oil and gas properties to various unnamed buyers for C$1.9bn in April, as it refocused its North American business on increasingly lucrative shale-gas plays (PE 3/10 p17).
While M&A activity in North America's unconventional plays has been grabbing much of the limelight, the rest of the world has seen no shortage of deals. Aside from BP's first foray into Brazil's offshore, Asian NOCs are also taking a foothold in Latin America, while some of the region's own powerful state-controlled firms have been investing heavily.
China National Offshore Oil Corporation (CNOOC) is taking a 50% stake in Argentine oil firm Bridas for around $3bn. Privately owned Bridas has exploration and production (E&P) assets in Argentina, Bolivia and Chile, as well as holding a 40% stake in BP affiliate Pan American Energy. CNOOC sees the purchase as the precursor to a larger presence in the region, with the firm's president, Yang Hua, saying Bridas provided "a very good beachhead for us to enter Latin America".
"Latin America is a very dynamic marketplace, with strong activity levels over the last three years," says IHS Herold's Sheehan. He expects strong regional players such as Brazil's Petrobras and Colombia's Ecopetrol to expand their positions regionally, as well as at home.
State-controlled Ecopetrol, listed on the New York stock exchange, is in the midst of a $60bn expansion plan aimed at increasing oil production to 1m b/d from an average of 0.67m b/d in 2009. Bolstered by strong support from President Alvaro Uribe, the firm aims to finance the programme through a mixture of cash flow, share sales and debt. Ecopetrol plans to issue up to $3bn in debt and is considering a Toronto share listing as part of the plan.
Petrobras, meanwhile, has been making its presence felt globally. Buoyed by a series of recent oil finds offshore Angola, the company has told the Angolan government it is interested in acquiring a greater stake in the country's ultra-deep offshore acreage, where the pre-salt geology is similar to that offshore Brazil. However, little is yet known of how that plan might be put into practice.
Chinese NOCs have set the pace in Angola recently, taking advantage of their government's long-standing economic ties with the west African country. And analysts expect Sinopec, which owns offshore assets through its 55% share in Sonangol Sinopec International, to look for further conventional E&P assets overseas, as it seeks to ensure stable supply to its domestic refineries.
A similar rationale lies behind M&A activity in other producing countries, such as Australia, where there has been a flurry of deals in the coal seam gas-to-liquefied natural gas sector, as Asian gas importers have been competing for resources (PE 5/10 p22). In the North Sea, utilities have been buying resources from E&P specialists in a bid to ensure energy security there. In April, for example, Scottish & Southern Energy (SSE) acquired Hess' North Sea gas assets for $423m. SSE says the deal will bolster its reserves as a hedge against price fluctuations. The gas will meet around 8% of SSE's demand initially.
Some of the biggest mergers have taken place in the oilfield-services sector, where margins have been under pressure. The better-financed firms have taken advantage of low prices on offer during the downturn to snap up rivals with complementary business portfolios, enabling them to become one-stop shops for explorers, as well as to better fund expensive research and development by pooling resources.
Following Baker Hughes' $6bn take-over of BJ Services and the purchase by Weatherford of TNK-BP's oilfield-services operations in Russia, Schlumberger agreed in March to buy Smith International in an $11bn-plus all-share deal (PE 4/10 p20). The investment, which would represent a premium of some 37% over Smith's share price at the time of the announcement, would give Schlumberger greater exposure to the US' unconventional gas sector and widen the gap over the world's second-largest services firm, Halliburton.
However, the deal has given rise to an in-depth anti-trust investigation, which is likely to hold up the merger until later in 2010 and could result in some asset sales. Schlumberger also plans to buy Geoservices, a French drilling data analysis firm, for $1bn.