Flat oil prices, cheap barrels and declining returns; are we on the cusp of a new super cycle in global oil and gas M&A? And can Middle East investors pick up global energy assets?
Middle East investors are expected to be among the major players on the look out for energy assets, as a new study believes an oil and gas merger and acquisition super cycle is under way.
Bernstein Research analyst Neil Beveridge says the conditions are ripe for new takeovers battle to unleash in the new year: flat oil prices, cheap barrels and declining returns.
In the Middle East's case, of course, the region has been watching with dismay the rise of shale oil and gas production in North America, which is expected to make the continent into a massive energy exporter within a decade.
BP's latest study shows the United States will surpass Russia and Saudi Arabia this year to emerge as the largest producer of liquid fuels.
The forecast was backed by the latest data from the U.S. Department of Energy which shows American oil production hit a 20-year high in the week ending January 11, to reach 7.04 million barrels per day.
But many of the North American continent's energy companies have been a victim of their own successes.
Rapid shale gas and oil production has depressed prices to under $3 per million British thermal units, compared to the global average of anywhere between $10-16 per Btu.
Capacity and pipeline constraints has also led to a divergence in Brent crude benchmark, which price most Middle East and Asian crudes to West Texas Intermediate (WTI), impacting companies bottom-lines and have depressed share prices.
Hence, the M&A opportunity for Middle East and Asian investors not just in North America, but also other parts of the world.
Bernstein's Mr. Beveridge says that the current M&A cycle is similar to the one seen in the 1990s that saw mega mergers, transforming the energy landscape.
"Between 1998-2001 over $500bn of M&A transactions were completed as companies such as Mobil, Elf, Petrofina, Arco, Texaco and Philips were subsumed by their larger rivals," said Mr. Beveridge.
The analyst believes there were four underlying factors which triggered this unprecedented wave of M&A activity:
(1) stable but declining oil prices,
(2) underperformance of the oil majors relative to the S&P,
(3) a desire to raise historically low returns on capital through cost cutting and economies of scale plus, and finally
(4) the emerging competitive threat from national oil companies.
The year 2012 was the best year for energy M&As, with nearly USD260 billion worth of deals reported, similar to the figure recorded 1998. This is in sharp contrast to the average USD150 billion deals recorded annually in the energy space.
"Clearly something is starting to change in the industry. Could this increase in activity mark the start of a new super-cycle in global oil and gas M&A?"
The Bernstein research echoes a recent Ernst & Young survey on oilfield services, which suggests M&A activity in the
QATAR LEADS MIDDLE EAST
Qatar has been a strong foreign investor in recent years and last year reportedly picked up a 4% stake in Anglo-Dutch giant Royal Dutch Shell, apart from investments in French major Total and other resource companies.
Meanwhile, Saudi Arabia made a strategic 30% stake in American company Frac Tech Holdings for USD2-billion. The company was among the key developers of the U.S. Barnett shale gas which led the shale revolution, and is expected to go global.
In addition, Aramco also has a joint partnership in Royal Dutch Shell's Motiva Refinery in Texas, said to be the largest in the country.
Abu Dhabi's Taqa already has a presence in Canada, and recently invested in a wind project in the United States.
Kuwait was reportedly in talks to buy a stake in Canadian oil sands Athabasca Oil Corp., but recent moves by Ottawa to restrict investments in the oil sands sector may have dashed hopes.
Nevertheless, the move shows Middle East's appetite for unconventional assets, especially in North America.
ASIAN GIANTS
But Middle East investors' efforts to buy oil and gas assets have been dwarfed by the Asian national oil companies' (NOC) appetite for big M&A.
"Last year was a record for out-bound Asian NOC M&A activity with over USD 60 billion deals completed.... In future we expect bigger and bolder deals from Asian oil and gas companies, as the share of oil and gas consumption by Asian countries continues to rise and pressure on Asian NOC's to 'go global' increases."
China, South Korea, India and Japan's hunger for oil and natural gas assets are insatiable, and while they are keen to secure long term deals with their Middle East crude suppliers, the lure of owning your own hydrocarbons' assets is irresistible.
Finally, there is another crucial reason for the surge in M&As. Major and mid-cap oil and gas companies are divesting assets to focus on key areas.
ConoccoPhillips and BP recently sold billions of assets across the world to focus on key areas, and in BP's to settle a massive oil spill lawsuit.
For Middle East investors, shale gas assets in North America, and particularly those with liquefied natural gas assets are especially attractive. Surely, Qatar is taking note of the developments to build LNG export terminal assets along Canada's West Coast and United States Gulf Coast.
"Outside of North America, we think western Australia LNG assets, East Africa gas and oil, Kurdistan, the Caspian and potentially deepwater Brazil and West Africa are all likely to be regions where there will be increased asset deals in 2013."
© alifarabia.com 2013
