M&A: Oil majors jockey for position to ride an LNG boom
Firms are reshuffling their portfolios in favour of gas ahead of the looming energy inflection point
Although gas may not dominate energy supply for another 10-20 years or more, the industry is looking over the horizon. Following on from a series of liquefied-natural-gas-driven M&As that included ExxonMobil's acquisition of a 25% stake in Mozambique Area 4 and Shell's purchase of Chevron's position in Trinidad, Total and others have maintained the momentum.
The latest round of deals reflects a continuing scramble for the whole working package-access to low-cost fields, transport, sales and purchase contracts, and regasification. In short, an investment that gets off to a quick and profitable start. Exxon, for instance, described its Mozambique acquisition as coming "at a cost of supply that is among the lowest for new LNG projects".
Total's $1.5bn acquisition of Engie's portfolio of upstream LNG assets, which closed in July, says a lot about where things are heading. Total bought from Engie not only participating interests in liquefaction plants-most importantly the interest in the Cameron project that gives the French giant a foothold in the US, but also regasification capacity in Europe and, to boot, an LNG tanker fleet.
Thus, Total has catapulted itself into the big league. Overnight the company becomes the second-biggest LNG player among the majors, with a worldwide market share of 10% and an overall LNG supply portfolio of almost 40m tonnes a year through equity liquefaction and third-party supply contracts. The long-term purchase and sale contract element of this portfolio will rise to 28mn t/yr by 2020. The combined firm will have liquefaction capacity of 23m t/y distributed globally and regasification capacity, centred on Europe, of 18m t/y.
There may not be many such step-change deals on the table. As Total's chief executive Patrick Pouyanné pointed out, the LNG sector is becoming "increasingly commoditised."
The desirable LNG companies know their price. One of the biggest deals that didn't get over the line was Washington-based Harbour Energy's year-long pursuit of Australian gas producer Santos. Its portfolio includes three projects in Australia and Papua New Guinea. Backed by private equity in the form of EIG Global Energy Partners, Harbour Energy suffered a slap in the face when its final offer of $10.8bn, more than 50% higher than its opening bid, was rejected.
If nothing else, that's an indication of how values are being pushed up.
FSRUs to the fore
As demand for LNG grows considerably faster than expectations, a key question for would-be buyers and sellers involved in smaller planned liquefaction projects is availability or otherwise of floating storage and regasification units (FSRUs). That's because of their relatively low cost, flexibility and increasing technical sophistication compared to shore-based plant - Total picked up two FSRUs from Engie as well as 18 carriers.
As consultant Wood Mackenzie points out, if an FSRU can be leased or acquired at short notice, it will kick-start revenues and make financiers more disposed to back a deal. It takes about 30 months to convert an LNG carrier to an FSRU and shipyards such as Singapore's Keppel have a full order book for these as well as floating liquefaction natural gas vessels (FLNGs), another kind of vessel in short supply.
But, at current rates of growth, gas will need all the capital it can get, whatever the source.
According to classification society DNV GL's latest Energy Transition Outlook, by 2025 expenditure on upstream gas will grow to $1.13 trillion. At that point, DNV GL estimates, gas will overtake oil as the world's primary energy source. "Gas will fuel the energy transition in the lead-up to mid-century," predicts the group's chief executive for oil and gas, Liv Hovem. The peak expenditure of $1.3 trillion, up from 2015's $960bn, will support a doubling of the LNG capacity that DNV GL expects to happen between 2018 and the late 2040s.
It's not immediately clear though where all that money will come from. As Shell has just pointed out in its LNG Outlook 2018, there's an investment gap that puts the growth of the global market at risk. For example, citing research by consultancies IHS Markit, Wood MacKenzie and others, Shell identifies an imminent decline in supply relative to demand that starts in 2022 and continues through to 2035. According to Shell's prediction, supply will fall short by nearly 300m t/y.
Simultaneously, potential financiers are facing tension between the growing trend to shorter and smaller contracts that buyers are demanding, and the requirement for stable revenues to back the debt required for LNG infrastructure.
"[There is] a stalemate constraining growth of LNG supply," points out Shell. "And LNG producers seek long-term sales to secure financing."
M&A finance remains readily available, but is coming with increasing strings attached. Total's acquisition of Engie's LNG business, for example, is partly contingent on the performance of the markets. If they pick up during the next few years, Total has agreed to hand Engie "additional payments of up to $550m" on top of the initial $1.5bn.
Private equity appears particularly interested in low-cost operators in exploration and production. Encouraged by efficiency gains in exploration in the North Sea, for instance, firms continue to pump their partners' funds into what many had assumed to be a dying area, where the big money would be in decommissioning.
Neptune's $3.9bn takeover of Engie's Norwegian upstream arm, which was part-financed by Carlyle and CBC Capital, and Chrysaor's $3bn acquisition of some of Shell's UK North Sea assets, which was part-funded by Harbour Energy and EIG Global Energy Partners, illustrate the continuing private equity investment trend in the North Sea.
Typically for private equity, both of these acquisitions came with a number of conditions attached. They're linked to oil prices, operational milestones and, with an eye to the future, decommissioning liabilities.
Azinor Catalyst, Point resources, Siccar Point Energy, Var Energy, Venture petroleum, Verus Petroleum, Wellesley Petroleum and Zennor Petroleum are other players active in the region with fund backing.
America's big players
In the US, private equity has continued to invest heavily in the industry following a big 2017 when no fewer than 15 of the top 20 deals, most of them in the Permian, were largely financed by private equity. The biggest was Parsley's $2.8bn acquisition of Midland Basin Acreage from Double Eagle Energy. But private equity still has plenty of spare fire power.
As upstream consultancy 1Derrick pointed out earlier this year, "private equity-backed E&Ps are looking to deploy fresh capital and private E&Ps are aiming to grow in a better oil price environment". According to 1Derrick, the big players in America are: Quantum Energy Partners financing HG Energy II; Canada Pension Plan Investment Board with Encio Acquisition Partners; Apollo Global Management with Chisholm Oil and Gas; and the triumvirate of Warburg Pincus, Yorktown Energy and Pine Brook with ATX Energy.
Privately-held trading houses are also injecting capital into the market, either through infrastructure or corporate investment, or through signing long-term offtake agreements that underpin smaller independents' project investment. The firms have been largely muted in the pure M+A sector since Trafigura completed its buy of a stake in India's Essar in mind-2017.
But Vitol in January announced the loan of $530m to Nigerian independent Shoreline to help fund a field development, agreeing to take future oil flows as repayment. Gunvor said in May that it was also looking to expand its loan-for-oil business in Africa and South America. Vitol's 0.7m t/y September deal with US independent LNG export terminal developer Cheniere will help to de-risk the latter's balance sheet and potentially improve its attractiveness as a takeover target.