While at first the oil price seemed to spur a rash of big M&A deals in 2014 and early 2015, analysts at GlobalData and IHS say the market could slow if the oil price doesn’t increase. Jeannie Stell reports.
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Image from Baker Hughes. |
Historically, the offshore market represents 15% to 35% of annual global upstream mergers and acquisitions (M&A) transaction value and deal count. Most recently, the industry has seen the majority of the deal-making become focused in the deepwater regions offshore Brazil and the US Gulf of Mexico. Overall, the recent deal activity includes region-focused asset acquisitions and multibillion-dollar individual transactions.
Since early 2014, the industry has seen fewer upstream deals overall, with no exception for offshore, says Matthew Jurecky, GlobalData’s head of oil and gas research and consulting. “We have seen half as many deals completed, in relation to offshore assets, in the first six months of 2015 as compared to the past six months of 2014.”
The reason is because low oil prices have depressed asset values, generally slowed the industry’s deal flow, and constrained available capital. “Offshore assets tend to require more capital, involve more risk, and have a longer development horizon than onshore, so it becomes a smaller pool of interested parties,” Jurecky says.
Brian Ferguson, M&A analyst for IHS, agrees. “The offshore asset transaction value plunged thus far in 2015, with only 10 transactions for a total US$5.45 billion through June 30. The bulk of the aggregate deal value was covered by Emirates National Oil Co.’s $1.7 billion offer to buy out the outstanding 46.1% of Caspian Sea-focused Dragon Oil, and Apache Corp.’s $2.1 billion sale of its Australia operations, with the remainder comprised mainly of asset transactions in the UK and Norwegian North Sea,” Ferguson says.
“In addition to the overall downturn in the upstream M&A market due mainly to the drop in oil prices, the offshore, particularly the deepwater, has been dominated by a small group of buyers with the financial resources to take on the costs of producing or development-grade projects. Many of the transactions in the deepwater have involved divestitures of mature producing assets by majors and other established players and select portfolio builder,” he says.
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Offshore upstream transaction value by asset segment. Figures represent all acquisition, merger, acquisition/jointventure, and swap reserve/resource and acreage transactions > US$10 million in deal value. From IHS. |
Pending a sustained rebound in commodities prices, IHS expects a modest increase in offshore deal activity compared to recent counts and value averages, including asset transactions for mature producing properties and interests in long-term developments.
Ferguson points to two recent transactions to illustrate the trends in the offshore upstream M&A market. First, in April 2015, Apache Corp. divested its remaining Australia exploration and production assets, comprised of North West Shelf shallow water producing fields, to a private equity partnership of Macquarie Capital Group and Brookfield Asset Management for US$2.1 billion.
“The transaction was part of Apache’s recent asset divestiture program of international interests to focus on core US onshore plays, similar to programs by several large US companies such as Devon Energy and ConocoPhillips. Financial buyers continue to pursue large upstream opportunities, more recently expanding focus to include offshore regions,” Ferguson says.
Second, in September 2014, Freeport-McMoRan Oil & Gas and its project partners acquired Apache’s interests in the Lucius and Heidelberg oil projects in the deepwater Gulf of Mexico for $1.4 billion. The deal included 55 MMboe of 3P reserves with no available proved reserve figure. The deal was transacted at an implied, but notable, deal price of $22.91/boe of 3P reserves.
“During 2009 to 2014, the deal pricing averaged nearly $24/boe for proved reserves in the deepwater Gulf of Mexico. The buyers are willing to pay prices similar to proved-reserve prices for large-scale undeveloped reserves,” Ferguson says.
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Image from Shell. |
However, more action could be seen in 2H 2015 if hydrocarbon prices increase, according to a recent report by Mergermarket. “Declining oil prices gained relative stability toward the end of 1H 2015, with West Texas Intermediate (WTI) crude oil prices rebounding from $43.58/bbl in January 2015 to around $58.30/bbl to date,” the firm reports.
As a result, upstream companies are taking notice, Mergermarket reports, particularly within the energy sub-sector, with 375 deals worth $264.8 billion announced in 1H 2015, up 37.7% in value. The deal value was bolstered by Royal Dutch Shell’s $81.2 billion acquisition of BG Group, which marked the second highest deal targeting the energy-mining-utilities sector on Mergermarket record, and which accounted for 77.3% of Europe’s total deal value in 1H 2015.
Yet, compared to 1H 2014, the 1H 2015 deal count was down 270 deals because 1H 2014 clocked in 645 deals worth $192.3 billion, with the top five deals of 1H 2014 within the energy sub-sector, the company reports. “The lion’s share of the deal value was seen in 2Q 2015, reflecting the uptick in oil price, with 188 deals worth $206.1 billion, accounting for 77.8% of 1H deal value.”
Other noteworthy pure-play offshore deals announced since the oil price began sinking include Petronas taking Statoil’s share of Shah Deniz for $2.25 billion; Pertamina buying a share of Murphy’s Malaysian portfolio for $2 billion, and Wintershall’s purchase of assets in the Norwegian continental shelf from Statoil for $1.3 billion.
“Several smaller deals have also occurred, including PGNiG acquiring fields in the North Sea from Total for $317 million, and PTTEP acquiring a stake in an offshore concession in Brazil from Shell for $200 million,” Jurecky says. “National oil companies, such as Pertamina, Petronas, and PGNiG, have been some of the most resilient across the industry in terms of maintaining activity, and this shows through in the deal flow.”
In other cases, companies are intent on raising capital by selling their low-growth assets to focus on high-growth projects or to stabilize their balance sheets, Jurecky says. Conversely, the buyers can benefit from predictable and stable returns, sometimes even skillfully improving operating margins through more focused development plans. The largest of deals, Shell’s acquisition of BG, Repsol’s purchase of Talisman, and LetterOne’s acquisition of RWE, were also, at least in part, driven by offshore asset exposure, whether the pre-salt in Brazil, Southeast Asia, or the North Sea.
Also, in May, Alfa and Harbour Energy said they planned to acquire the remaining 81.05% stake in financially-distressed Pacific Rubiales Energy for $5.3 billion, which could have been the fourth largest upstream deal announced since oil prices collapsed. However on 9 July, Alfa and Harbour Energy withdrew their proposal citing early proxy returns that suggested a significant number of shares would vote against the takeover.
"As previously stated our offer of $6.50 CAD per share was full, fair and final, and therefore we have no plans to revise the proposal,” said Linda Cook, Harbour Energy CEO, at the time the takeover was called off. “As a result, we have agreed with [Pacific Rubiales] to terminate the arrangement agreement."
Back in June, after the deal was first announced, GlobalData’s Jurecky was positive about Alfa and Harbour’s announcement, calling it “a strong move strategically for more participation in Mexico.”
If oil and gas prices continue to stabilize, or even slightly increase, 2H 2015 could see marginally increased offshore upstream M&A activity with values similar to, or slightly higher than, the first half of the year.
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Pacific Rubiales buyout off the table
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