Offshore staff
HOUSTON –The first half of 2013 produced $49 billion in mergers and acquisitions deals and with a late flurry in the second half ended with $143 billion of global upstream deals, 39% down from 2012.
The Evaluate Energy M&A report said that the No. 1 driver of confidence and, therefore, investment in the oil and gas E&P sector is the current and anticipated price of oil, followed to a lesser extent by the price of gas. Neither has changed much since 2012 and do not explain the fall in M&A activity in 2013.
The WTI benchmark price averaged $98 per barrel in 2013 versus $94 in 2012, and the Brent benchmark averaged $108 per barrel in 2013 versus $111 in 2012. In terms of gas prices, the US has even seen an increase in the Henry Hub benchmark ($3.71 per mcf versus $2.75 in 2012), while gas prices in the rest of the world outside of North America have remained robust, judging by company-reported gas price realizations.
The economic performance of key countries does not explain the subdued level of activity, either, with China meeting all of its growth targets during the year, Europe faring better as a whole than in 2012, and the US stock markets reaching record highs in December 2013.
Evaluate Energy said reason for the drop in industry M&A has not attracted the same level of headlines as unrest in the Middle East, offshore oil spills, or Arctic drilling, yet it’s doing more damage to the prosperity of E&P companies. That reason is: The cost of finding, developing, and extracting oil for public oil companies is steadily increasing.
A recent study by Evaluate Energy to review historic financial and operating results of 52 large cap companies concluded that the full-cycle cost required to sustainably produce a barrel of crude oil surpassed $85 in 2012, which is 87% higher than the $45 required in 2008. This has had a negative effect on M&A investment in three ways.
1. The earnings of E&P companies have dropped in tandem with rising costs (cumulative net income for the first nine months of 2013 is down 15% compared to the same period in 2012, based on the results of 170 companies), which has resulted in less free cash flow.
2. The company said that the increased cost of successful exploration and development of existing properties owned by companies has resulted in less spare capital to take advantage of M&A opportunities.
3. The decreased projected profit per barrel means it is harder for an asset to meet the threshold requirements of a public company’s investment appraisal.
The large total deal value in 2012 was boosted by the $57 billion acquisition of TNK-BP by Rosneft, which also pushed the percentage of upstream deals made by state-influenced companies up from 25% of all deals in 2011 to 44% in 2012. Despite lacking a deal of similar magnitude, state-influenced companies maintained this ratio in 2013, accounting for 42% of total deals.
The reasons for the lack of public company activity do not apply to the same extent for state-backed companies, for whom any investment appraisal can be less stringent and based more on the security of long-term reserves rather than a rate of return target. Free cash flow is also less of an issue when a country’s treasury can be a source of cheap financing.
National oil companies (NOCs) also face less political risk, as they will not be able to match the diplomatic assurances that being a state-backed company can bring. This is why a company such as Sinopec, backed by the Chinese government, can be at ease with acquiring Apache’s Egyptian assets for $3.1 billion, despite unrest in the country.
Other notable deals by NOCs during 2013 include CNPC acquiring an 8.4% stake in the Kashagan project for $5.4 billion, CNPC acquiring a 20% interest in Mozambique Area 4 for $4.21 billion, Rosneft acquiring a 49% interest in ITERA Oil and Gas Co. for $2.9 billion, and OMV’s acquisition from Statoil of producing assets offshore Norway for $2.65 million.
The report noted that another trend continuing from 2012 into 2013 is the rise of investment in Africa. With most of the continent underdeveloped, the bulk of Africa is accommodating to both small-cap explorers via open licensing round auctions and larger-cap companies that have the capital and expertise to develop large-scale projects.
Upstream M&A in Africa has increased from $7 billion in 2011, to $10.6 billion in 2012 and $17.4 billion in 2013, which represents rises of 51% and 64% per year, respectively. A key stimulus of rise has been the huge gas discoveries made in the Rovuma basin offshore Mozambique by Anadarko and Eni, which have revealed 200 tcf of gas in place so far.
In 2013 alone, there were six deals in the Rovuma basin valued at a total of $9.3 billion. Notable among them were CNPC acquiring a 20% interest in Area 4 for $4.2 billion, ONGC striking two deals to acquire a total of 20% in Area 1 for $4.125 billion, and Oil India purchasing a 10% interest in Area 1 for $990 million. These deals suggest a cost per recoverable boe of $3 ($0.50 per Mcf), which, compared to the potential value per Mcf on the Asian market of $15+, would initially look like good value.
These discoveries do, however, have the dual problem of being in deepwater and being gaseous, and will therefore require a substantial investment in LNG export facilities, pipelines, and possibly even floating LNG facilities. All are expensive in terms of capital and time, before any real profits can be made. This is the reason that the partners Anadarko and Eni have attracted so far are state-backed companies from gas-importing countries, whose investment criteria will be long-term secure resource supply rather than satisfying the criterion of an NPV analysis.
Elsewhere in Africa, Tanzania (north of Mozambique) has had a similar experience to its neighbor, albeit to a lesser degree. Drilling of Tanzania’s deepwater prospects has exposed gas fields large enough to warrant the development of LNG export facilities but with Mozambique’s discoveries being over four times larger than Tanzania’s, Tanzania has failed to attract the same level of investment with only two deals taking place during the year in the country for $7.5 million.
The report noted that North American shale acquisitions are diminishing.There has been a significant drop in the volume of shale deals, it said, which has also had an impact on the global volume of deals in 2013. In 2011, shale deals accounted for $59.4 billion; in 2012, this was reduced to $33.3 billion; and, in 2013, this dropped further to $22.3 billion.
This transition is due in large part to the North American gas glut, which has kept a firm lid on the gas price, and also to the fact that many large-cap companies already have strong acreage positions and are now focusing on development rather than acreage inventory.
Heading into 2014, Evaluate Energy forecasts that the stifled gas price will continue to hamper upstream M&A in North America. Although an equalization of the gas price globally will go a long way to restoring the valuation of gas assets. This will not happen for at least another four to five years, if at all – a time frame that is beyond the patience of a typical shareholder in a public company.
Since the shale gas revolution in North American took hold in 2008, gas production has increased by 8 bcf/d, but the first onstream LNG export terminal is not expected in the US until 2015, with 0.8 bcf/d of capacity rising to 2 bcf/d in 2016.
Africa will also continue to hold ample opportunities in the coming 12 months. There are five licensing rounds due to close during 2014 in the continent, Tanzania, Libya, Angola, Republic of Congo, and Kenya.
Like Tanzania and Mozambique, Kenya sits on the East African coast, but, unlike its neighbors, Kenya’s recent successes have been oil discoveries rather than gas, which will whet the appetite for the world’s largest companies and should result in some prominent bidders when the auction begins.
Two of the main drivers for the US oil industry growth in the past decade have been the Eagle Ford shale play and the Gulf of Mexico, both of which straddle a border between US and Mexico. While the US portions of these plays have developed into a multi-trillion-dollar industry, Mexico’s restrictive oil regime has resulted in only a fraction of the same success.
In December 2013, the Congress in Mexico passed a bill to allow foreign companies to take part in the exploration and development of the Mexican oil industry via production sharing contracts. The terms of the contracts have yet to be ironed out, but 2014 will be a year where Mexico firmly enters the strategic thinking of the major and mid-cap global independent oil companies.
01/16/2014
