Perth-based partners in the Galoc field, offshore the Philippines, Otto Energy and Nido Petroleum, are high on the list of those mentioned as a possible takeover targets by many in the industry and fall into the second category.
The project came on-line in October 2008 after an extensive, and expensive, development phase and was producing about 15,000 bopd. Since then the dramatic plunge in the price of crude oil has impacted heavily on the industry and Otto has been obliged to announce debt and facilities issues related to the project to the ASX. Therefore, the capital expenditure component of the project has drained finances and left the companies’ accounts at their lowest ebb. On the opposite side of the ledger, the income stream that should be available to bolster the companies’ defences is far less than was probably budgeted for just months ago and is not flowing as freely as expected, thus leaving the companies vulnerable to takeover attempts.
And with Australian companies reputed to be considered, by international standards, cheap in current market conditions the news for vulnerable companies is not good.
“I heard a well-respected guy in the industry say there’s about 90 oil companies on the ASX at the moment and the expectation is that in a year or 18 months there’ll be less than 50% of that number”, Nido Assistant Managing Director Joanne Williams said.
“Our share price is low compared to its history but our de-risking of the company has come ahead in leaps and bounds particularly over the past six months, which hasn’t been reflected in the share price I don’t think. We’ve got Galoc on-line, made two discoveries and are moving those forward into development next year and we’ve got a huge exploration portfolio which we have been told is the envy of several of the majors. All of that adds up to us being in a fairly vulnerable position.”
And the threat from outside the company is one that Nido takes seriously. Williams said, while it couldn’t do anything about market conditions, the company could prepare a position to defend itself against such a move.
“We’ve just been through a period of high oil prices and major companies who have had lots of production through that period are very cashed up. It’s probably going to be an opportunity for somebody with a lot of cash to get a hold of what they might consider to be good assets”, she said.
Williams said, to do that, managment needed to understand the value of the company and where the major contributors of that value came from. They then need to be able to clearly illustrate this to the stakeholders who will ultimately make the decision to accept any offer from a third party.
She said managing relationships with key shareholders and making them feel comfortable with the long-term strategy of the company is paramount in maintining that relationship.
“The conclusion that you hope they will draw is that the current board and management team are the people who can better monetise the assets the company has”, Williams said. Oil and gas analyst with WA-based financial services company Hartleys, David Wall, said the tell-tale signs that conditions were affecting the sector had begun appearing.
======================================================= The State Of The Industry: Mergers And Acquisitions The Hot Topic In Boardrooms As Consolidation Looms
The slump in the price of oil has proved to be a double-edged sword for economies worldwide which, while crying out for relief from skyrocketing energy prices, now also crave stability in a time of economic volatility.
Experts warn allowing the price of oil to remain in the doldrums is setting the scene for a magnified repeat of the price cycle which saw the price of crude hit record levels in 2008. London-based analyst with Sanford Bernstein, Neil McMahon, said producers may postpone investment in marginal projects, curtail expansion and, for the first time in a decade, cut exploration. These factors combined, he said, may affect production capacity in 2013 to 2016.
While the plummetting price has spared consumers and fuel-reliant industries, it is also squeezing oil companies who could invest in new resources, spurring concern that prices will prompt them to shelve investments.
Because of the rapid collapse in crude-oil prices, combined with the crunch in financial markets, investors need to focus less on growth and more on survival.
Managing Director of 3D Oil Noel Newell, speaking to Business Spectator’s Isabelle Oderberg, said investment in oil and gas would decline dramatically but, because of its necessity, a recovery in the price was inevitable. The lower the price dipped now, the higher it would soar when markets recovered.
“The International Energy Agency, I believe, is predicting that, in the next year or two, we should see the prices come up to around $80.00 to $100.00 bbl. I think most people in the oil business think that, but in the meantime a lot of companies are going to suffer”, he said.
That suffering is gathering pace with the valuations of many oil companies revised ever downward as the price of oil plumbs depths many in the industry thought impossible just months ago. Shares in the world’s largest oil companies including BP, Royal Dutch Shell, ExxonMobil, Total and Chevron are down by more than a third from their peak in May 2008.
Smaller companies, regardless of their location, have been hit even harder. The value of Ernst and Young’s index of 20 oil and gas companies listed on London’s Alternative Investment Market (AIM) has halved since the beginning of 2008. The nett result is that there is a smorgasboard of assets available to buyers with finance, and major international oil companies are expected to cherry-pick reserves from their smaller cash-strapped colleagues.
“For companies with a hole in their production profiles in the longer term, this will be the time to seize the day and replenish the portfolio with quality reserves at low prices”, said a report from analysts at broker Sanford Bernstein.
The last great wave of consolidation in the sector, at the end of the 1990s when the oil price dipped to around US$10 bbl, saw BP buy US companies Amoco and Arco while a US$75 B all scrip deal saw Exxon merge with Mobil in, what was then, the largest takeover in corporate history. Exxon has made no sizable acquisitions since that deal closed in 1999.
This time around, cash-rich companies like ExxonMobil and BP are tipped to be the most likely acquirers because, without enough projects in the pipeline, acquisition is the fastest route to increased reserves. Analysts said ExxonMobil, the world’s largest publicly traded company by both profit and market capitalisation, is one of few companies with enough financial firepower to pull off a major deal. The oil industry behemoth was in such an enviable position because it hadn’t chased oil’s recent bull run and, while other companies had acquired expensive assets that would now drain operating income, Exxon CEO Rex Tillerson had chosen to sit on the sidelines.
This fiscal discipline gave the company ample room to weather the plunge in oil prices that now has other companies, and entire countries, floundering. Tillerson said, because Exxon could provide its own financing for projects, it was easier for host governments and national oil companies to secure funds because they weren’t out competing for the same investment dollar.
As an example, in an Australian context, one need look no further than the company’s US$10 B proposed Papua New Guinea LNG project of which Oil Search has an interest of around one third.
Although Oil Search had around US$1 B at its disposal it would need to triple that amount to finance its share of the project in an environment where gaining access to finance would be, at best, challenging. Despite the expectation that a Final Investment Decision (FID) will be made by the end of 2009, Oil Search Managing Director Peter Botten said the company was very comfortable that it was meeting the objectives of the project as, and when, they were needed.
Analysts point to the presence of ExxonMobil as the source of this comfort and Botten himself hints at this; ‘a very cohesive joint venture’ is has put the company slightly ahead of the pack in terms of other LNG projects that are vying for similar time windows. The facts behind the strength of ExxonMobil leave no room to doubt that confidence is well placed. Since the beginning of 2000, Exxon has increased its cash on hand from US$3 B to US$36.7 B and has also purchased 2.2 B of its own shares worth US$170 B.
Observers said Exxon could make a bid for Royal Dutch Shell ... a move that would give it access to more oil reserves in West Africa and turn it into the uncontested giant of the global gas trade. Such a deal, however, would face intense regulatory scrutiny around the world and leave the company with a raft of other difficulties given its global nature.
Other scenarios suggested involve Exxon seeking to arrange a partnership with a foreign country. In particular, analysts see a partnership with Brazil as a possibility.
However, the Western oil companies won’t be the only bargain hunters out there and, according to the China Daily newspaper, PetroChina is also looking at buying foreign oil companies caught short in the financial crisis.
Cash is king and 3D’s Newell told Business Spectator a similar situation is expected on the Australian corporate scene with the oil and gas companies that proliferated in the high cost environment of the past few years culled as low oil prices are exacerbated by global financial crisis constraints.
He categorised vulnerable companies in the oil business into three groups. The first, ‘distressed companies’ which bought out their hedges at the top of the oil price or borrowed to develop their fields, would struggle to service debt.
Companies in the second category with ‘distressed assets’, which were generally potential sources of production in a development phase that required further investment before any return could be realised, will face divesting those assets before they achieve that potential, thus handing the buyer a glittering prize.
“Thirdly there are companies that went in and got some big commitments in the last couple of years and when oil prices were running high”, he said.
When asked, Newell said he was not in a position to comment publicly on companies that, in his opinion, might fall into any of these categories. However, industry watchers said, in the first category, the decision by any company to cancel major infrastructure projects and purchases may be a sign they are having problems servicing their debt.
Perth-based partners in the Galoc field, offshore the Philippines, Otto Energy and Nido Petroleum, are high on the list of those mentioned as a possible takeover targets by many in the industry and fall into the second category.
The project came on-line in October 2008 after an extensive, and expensive, development phase and was producing about 15,000 bopd. Since then the dramatic plunge in the price of crude oil has impacted heavily on the industry and Otto has been obliged to announce debt and facilities issues related to the project to the ASX. Therefore, the capital expenditure component of the project has drained finances and left the companies’ accounts at their lowest ebb. On the opposite side of the ledger, the income stream that should be available to bolster the companies’ defences is far less than was probably budgeted for just months ago and is not flowing as freely as expected, thus leaving the companies vulnerable to takeover attempts.
And with Australian companies reputed to be considered, by international standards, cheap in current market conditions the news for vulnerable companies is not good.
“I heard a well-respected guy in the industry say there’s about 90 oil companies on the ASX at the moment and the expectation is that in a year or 18 months there’ll be less than 50% of that number”, Nido Assistant Managing Director Joanne Williams said.
“Our share price is low compared to its history but our de-risking of the company has come ahead in leaps and bounds particularly over the past six months, which hasn’t been reflected in the share price I don’t think. We’ve got Galoc on-line, made two discoveries and are moving those forward into development next year and we’ve got a huge exploration portfolio which we have been told is the envy of several of the majors. All of that adds up to us being in a fairly vulnerable position.”
And the threat from outside the company is one that Nido takes seriously. Williams said, while it couldn’t do anything about market conditions, the company could prepare a position to defend itself against such a move.
“We’ve just been through a period of high oil prices and major companies who have had lots of production through that period are very cashed up. It’s probably going to be an opportunity for somebody with a lot of cash to get a hold of what they might consider to be good assets”, she said.
Williams said, to do that, managment needed to understand the value of the company and where the major contributors of that value came from. They then need to be able to clearly illustrate this to the stakeholders who will ultimately make the decision to accept any offer from a third party.
She said managing relationships with key shareholders and making them feel comfortable with the long-term strategy of the company is paramount in maintining that relationship.
“The conclusion that you hope they will draw is that the current board and management team are the people who can better monetise the assets the company has”, Williams said. Oil and gas analyst with WA-based financial services company Hartleys, David Wall, said the tell-tale signs that conditions were affecting the sector had begun appearing.
Perth-based explorer Comet Ridge announced recently that its managing director had resigned and none of its non-executive directors would be paid for their roles after October’s financial market meltdown. Another company reported to be restructuring operations in response to current market conditions is Strike Oil who, it’s rumoured, have put all exploration on hold and will cease all but its US-based operations.
Wall said other junior explorers were also on the edge because of the crimped debt markets.
“The smaller caps will be very disadvantaged, because all the big cap companies get the first crack at the capital, if there’s anything left then they might get a go”, he said.
He said options for companies now were to put everything on hold, find a ‘big brother’ or undertake mergers.
“A lot of these juniors are going to have to think outside the box in this climate ... it might not be a two company merger, you might see three companies looking at getting together to pool funds and just survive”, he said.
Wall added, while the current climate meant cutbacks for some companies, it offered expansion opportunities for others.
“There’s a few companies out there that do have cash balances, they’re going to find themselves in a very strong position to pick up some strong assets”, he said. “I could see some other larger companies such as AWE which have cash in the bank that could go on a spending spree to pick up some assets.”
Wall said many juniors, whose goal was to find a transformational asset, are more used to knocking back deals than seeking out finance, would find the game has now changed.
“When the oil price was quite high, a lot of these companies were still at the table but they were only willing to do deals at very high prices ... now that it’s dropped off and the deals are twice as cheap, but they’ll have no choice”, he said.
Potential buyers included Origin Energy and AED Oil which, with $300 MM in cash on its balance sheet after selling 60% of its main oil assets to China’s Sinopec, was assessing possible acquisitions.
At the company’s annual meeting in Melbourne, CEO David Dix said that, despite the market punishing share prices across the sector, the poor economic environment presented buying opportunities. He said the company would look at synergistic acquisitions as they arose but would ensure the company maintained a healthy balance sheet amid the uncertain economic environment.
“We’re in a position, I think, to join with others which may have short-term funding needs and short-term income opportunities”, Dix said. “We’re in a position to look at other opportunities as they arise and evaluate them to see whether they would make a synergistic acquisition.”
WA-Based Tap Oil, with $60 MM on hand, is another company expected to be in the market for acquisitions but, when asked, Tap CEO Peter Stickland said it was not an issue he wished to discuss in the media.
Among other companies that may be looking for merger or acquisition opportunities, Newell said AWE was an obvious predator and Beach Petroleum, which had struggled to grow its reserves recently, could be in a financial position to take advantage of the current market. He also said 3D Oil had been approached many times to merge and was receiving an offer a week but the right opportunity was yet to present itself.
Like many in the industry, Newell regards his company as a potential predator as opposed to prey and a recent offer from rival Drillsearch was rejected by the 3D board which said it did not reflect the value of company.
“We’ve got a bit of money in the bank and we’ll be looking at other opportunities, because they are going to be at rock bottom prices”, Newell said.
“A lot of these smaller companies that are really struggling, when you go and look at what they’ve got, have skeletons in the closet, such as a well to drill in 1,000 m of water ... some are locked into contract rates that were set a year or two ago and just to mobilise some of these rigs into deep-water is going to be $10 MM alone, before you’d actually drill the well. Some of these wells are costing $30 MM”, he said.
To read the full transcript of the Business Spectator interview with 3D Energy’s Noel Newell online go to www.businessspectator.com.au/interviews
(20min delay)