After analysing financial transactions for the second quarter of 2013 in the oil and gas industry, Eoin Coyne and his colleagues at London-based Evaluate Energy say that several key trends have emerged, including the impact of national oil companies (NOCs) and the transition of substantial gas discoveries during 2012 into multibillion-dollar deals.
One of the more significant statistics to surface is that total deal value in the upstream sector during Q2 2013 came to just $23.6 billion, lower than any other quarter since Q3 2009. Q3 2009 had its own strong reasons for being sluggish; during the quarter the credit crisis had claimed its first major victim with the collapse of Lehman Brothers, the US Henry Hub gas benchmark fell below $2 and oil prices were still recovering after plummeting to $30 at the end of 2008. The explanation behind the latest quarter’s lacklustre performance, however, lacks the same drama; oil and gas prices have shown stability during the quarter at $90 per barrel of oil and $4 per mcf of gas in the US. Economic uncertainty still lingers though especially within the austerity-hit European market and many CEOs are erring to the side of caution when it comes to expanding beyond their company’s reach.
Due to these reasons, perhaps it’s no surprise that the largest deals during the quarter involved national oil companies, who are less influenced by short and medium term economic fluctuations. The largest deal of the quarter involved ONGC and Oil India, who acquired a 10% stake in the 100+ tcf gas discovery offshore Mozambique in the Rovuma basin for $2.5 billion from Videocon Industries. The $0.50 cost per recoverable mcf of gas reserves would usually represent good value but commercialization of the asset is at least five years away and will require large upfront payments to develop the field and construct the necessary LNG exporting terminal which would have made this field fall short of many public companies’ investment appraisals. The deal follows the acquisition of Cove Energy at the end of 2012 when another national oil company, PTT, keen to gain control of the company’s flagship asset of an 8.5% interest in the Rovuma Offshore Area 1, paid $2.2 billion.
The next largest deal involved Lukoil acquiring the Russian assets of Hess Corp for $2.05 billion. The deal was initially expected to raise little over $1 billion so the price negotiated can be seen as a coup for Hess. With Russia’s steep production and corporate taxes, typical per proven barrel of reserve metrics seldom exceed $5 per boe (Rosneft acquired TNK-BP for $5.13 per boe of proven reserves in 2012), yet the Hess deal equates to approximately $25 per proven boe for the oil rich assets.
Chinese companies were uncharacteristically quiet in terms of new deals during the quarter with only one notable transaction taking place; Sinopec acquired a 10% interest in Block 31 offshore Angola. In the past couple of years, Chinese-based companies averaged $8.4 billion of new global E&P deals per quarter, yet in Q2 2013, this deal between Sinopec and Marathon made the total just $1.5 billion. Despite the lack of traditional M&A, China did grab the world’s attention when it agreed a crude oil marketing deal with Rosneft worth $270 billion over 25 years to import 300,000 b/d including a $70 billion upfront cash payment.
The third largest deal also came from Africa with Petrobras divesting a 50% stake in all of its African operations for $1.525 billion to Banco BTG Pactual S.A.. The divestment is part of Petrobras’ $9.9 billion divestment plan to partly fund development of its huge pre-salt oil reserves off the coast of Brazil, which will require $107 billion investment over the next 5 years. The deal involves 73.9 million boe of proven reserves which are 95% oil and 57% developed, along with a considerable portfolio of exploration assets. Given the amount of exploration upside in the deal the price paid per proven reserve of $20.63 represents an impressive deal for the buyer.
In the UK, the budding onshore shale sector received a boost with its first major deal when Centrica farmed into a 25% stake in Cuadrilla Resources’ Bowland License for $152 million. All the recent hyperbole surrounding this sector has been worth its collective weight in hot air so far, but now the industry is set to have a six-well drilling program that will go a long way to discovering if the impressive reserve estimations can be converted into commercial operations. So far, there has not been a true shale success story outside of North America, as Poland has yet to fulfil its early promise and any progress in France was quickly halted by environmental lobbyists. Despite potential environmental concerns the UK may also face, the sector will benefit from its strong indigenous demand, thereby foregoing the need for any LNG capabilities, and having a government who are keen to maximise tax revenues in the face of enforced austerity measures and the threat of Scottish devolution, which would take a large portion of the North Sea tax Revenues away from the UK Treasury.
In terms of deals that closed during the quarter, there was one major deal completed as Freeport McMoRan Copper & Gold, Inc. finalized its $18.9 billion purchase ($9 billion excluding debt) of Plains Exploration & Production and McMoRan Exploration. The closures came amidst pressure from the Plains shareholders for the purchase price to be increased after there was a significant oil discovery in the company’s 50% owned Phobos asset in the Gulf of Mexico. Evaluation work is still underway at the discovery, so the full extent and value of the find is still yet to be determined, but Freeport relented to the demands and paid a special dividend upon closing worth an extra $1 billion to the Plains shareholders.
Following a vast deal value and count in Q4 2012, 2013 was touted by some as being a year with a large amount of potential for oil and gas deals due to stable commodity prices and an improving (albeit languidly) global economy. This has not proven to be the case so far in the first half of the year with the total deal value of $51.5 billion, which falls far short of the deal value in 2012 at the same point ($84.8 billion) and 2011 ($70.2 billion). There are still enough companies however requiring large capital injections (shale acreage holders, potential LNG assets, Brazil’s pre-salt sector) and enough money in Chinese and Russian hands to potentially bring the deal values back into line with recent years before the year is done.