Singapore, with its multitude of oilfield equipment and services firms, should also witness increasing M&A activity
By CLAUDE ILLY 05 January 2010
2009 was a roller-coaster year for the global economy. The oil & gas sector felt the full brunt of the ride, with oil prices dropping from their 2008 highs of more than US$140 per barrel down to less than US$40 a barrel in February 2009 and back up to almost US$80 per barrel recently.
The main reason for the precipitous drop in crude prices was a material decrease in global demand as a result of the broader economic crisis combined with increasing global crude production capacity which resulted in large spare production capacity and huge build-ups in stocks of crude and refined products. The present crude supply-versus-demand fundamentals are still bearish as spare production capacity and inventory levels remain at five-year highs and as global demand has not started yet to materially pick up.
Therefore, the strong run-up in crude prices over the last six months has been mostly an anticipation of a future tightening of the crude supply/ demand balance as a consequence of the improving economic outlook.
The long-term outlook for crude oil prices is indeed bullish. In spite of forecasts of permanently decreasing demand in Organisation for Economic Co-operation and Development countries as governments push through energy-efficiency initiatives to decrease greenhouse gas emissions, global oil demand is expected to increase as a result of growing consumption in emerging countries.
Supply side
However, the long-term supply outlook is challenging as new oil & gas discoveries may not be material enough to satisfy increasing demand and to compensate for the natural depletion rate of oilfields. The intrinsic characteristic of oilfields is that their production rate peaks during the first few years of production and then steadily drops.
This natural depletion phenomenon removes around four million barrels per day (mbpd) of worldwide production capacity every year. Thus, just to keep global crude oil production steady at present levels of 72.5 mbpd, every year new oilfields with a cumulative production capacity of four mbpd need to be developed.
To try to put this number into scale so as to highlight the future supply challenge we are facing, four mbpd is equivalent to the year 2008 output of the fourth largest crude-producing country in the world: Iran.
This anticipation of future global crude production challenges is an important factor driving many Asian national oil companies (NOCs) to buy oil reserves abroad in order to try to satisfy their increasing domestic thirst for oil. In that respect, Asian NOCs have taken strong advantage of the rare opportunities that the year 2009 offered to buy large upstream oil & gas assets or companies at attractive prices.
Global merger and acquisition (M&A) activity in the oil & gas sector over the year 2009 has mainly followed oil prices. Worldwide upstream deal count dropped from a high of 98 M&A transactions in the second quarter of 2008 to a low of 30 transactions in the first quarter of 2009, and then rebounded to 79 transactions in the third quarter of 2009 as oil prices stabilised above US$60 per barrel.
Post the economic nadir of March 2009, Asian NOCs, in particular those from China and South Korea, have been at the forefront of global upstream M&A activity. Year to date, Asian NOCs have made acquisitions totalling more than US$20 billion in value, the three largest transactions being Sinopec’s US$8.8 billion acquisition of Addax Petroleum, KNOC’s US$4.2 billion acquisition of Harvest Energy Trust and CNPC’s US$1.7 billion acquisition of Athabasca Oil Sands.
Asian NOCs, with their access to a wide pool of funding and the strong mandate from their governments, will continue to be very active buyers of exploration and production (E&P) assets and companies worldwide for years to come. In this part of the world, we should also expect to see continued M&A activity in Australia, in particular in connection with the numerous coal-seam-gas and liquid-natural-gas export projects being discussed there.
In North America, post-Suncor Energy’s US$20.5 billion acquisition of Petro-Canada in March 2009, ExxonMobil’s recent acquisition of XTO Energy for US$41 billion is also a precursor of a material increase in M&A activity in that region which will be driven by the improving global economic outlook, by the positive long-term outlook for oil & gas prices and by the drive to acquire unconventional oil & gas reserves.
If oil prices remain steady or continue to increase, the years 2010 and 2011 could become record years for oil & gas M&A activity in the upstream E&P end of the supply chain as the market turns bullish, buyers decide to make their move and the availability of capital from lenders improves.
Credit facility
If oil prices drop, there will be increasing pressure on distressed companies to sell and deals are likely to ensue, albeit at more subdued volumes.
An important swing factor for future M&A deal volumes will be the availability of credit. Although some banks have started to increase lending to the sector, in general it is still difficult to obtain credit to finance acquisitions. Therefore, higher volumes of M&A activity will be highly dependent on lenders willingness to open their purses.
The recovery of M&A activity in the oil & gas sector during the year 2009 has been led by E&P. However, as in previous cycles, the increase in upstream activity should start to feed-through into the oilfield equipment and services (OFS) sector.
Total OFS deal volumes fell to a 10-year low in the first quarter of 2009 but transaction volumes have started to pick up. The main M&A drivers here are a combination of over-leveraged distressed sellers combined with the highly fragmented nature of the industry which is ripe for consolidation.
This should represent significant growth opportunities for large cash-rich OFS companies. Singapore, with its multitude on OFS companies, in particular in the marine and offshore sub-sectors, should also witness increasing M&A activity, led by distressed sellers, consolidators and overseas players seeking to enter the growing Asia-Pacific market.
The outlook for M&A activity in the downstream refining and marketing end of the supply chain remains dim, in particular in Europe and in North America. These regions are likely to face chronic refining overcapacity as governments push through initiatives to lower greenhouse gas emissions, which will drive consumers to use increasingly energy efficient means of transportation.
In this environment of low refining margins and uncertain profitability outlook, buyers will remain on the sidelines unless asset prices drop to bargain levels.
The writer is executive director and head of Oil & Gas - Asia Pacific, Corporate Finance Advisory at Deloitte & Touche Financial Advisory Services Pte Ltd
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Bullish outlook for oil & gas sector
Singapore, with its multitude of oilfield equipment and services firms, should also witness increasing M&A activity
By CLAUDE ILLY
05 January 2010
2009 was a roller-coaster year for the global economy. The oil & gas sector felt the full brunt of the ride, with oil prices dropping from their 2008 highs of more than US$140 per barrel down to less than US$40 a barrel in February 2009 and back up to almost US$80 per barrel recently.
The main reason for the precipitous drop in crude prices was a material decrease in global demand as a result of the broader economic crisis combined with increasing global crude production capacity which resulted in large spare production capacity and huge build-ups in stocks of crude and refined products. The present crude supply-versus-demand fundamentals are still bearish as spare production capacity and inventory levels remain at five-year highs and as global demand has not started yet to materially pick up.
Therefore, the strong run-up in crude prices over the last six months has been mostly an anticipation of a future tightening of the crude supply/ demand balance as a consequence of the improving economic outlook.
The long-term outlook for crude oil prices is indeed bullish. In spite of forecasts of permanently decreasing demand in Organisation for Economic Co-operation and Development countries as governments push through energy-efficiency initiatives to decrease greenhouse gas emissions, global oil demand is expected to increase as a result of growing consumption in emerging countries.
Supply side
However, the long-term supply outlook is challenging as new oil & gas discoveries may not be material enough to satisfy increasing demand and to compensate for the natural depletion rate of oilfields. The intrinsic characteristic of oilfields is that their production rate peaks during the first few years of production and then steadily drops.
This natural depletion phenomenon removes around four million barrels per day (mbpd) of worldwide production capacity every year. Thus, just to keep global crude oil production steady at present levels of 72.5 mbpd, every year new oilfields with a cumulative production capacity of four mbpd need to be developed.
To try to put this number into scale so as to highlight the future supply challenge we are facing, four mbpd is equivalent to the year 2008 output of the fourth largest crude-producing country in the world: Iran.
This anticipation of future global crude production challenges is an important factor driving many Asian national oil companies (NOCs) to buy oil reserves abroad in order to try to satisfy their increasing domestic thirst for oil. In that respect, Asian NOCs have taken strong advantage of the rare opportunities that the year 2009 offered to buy large upstream oil & gas assets or companies at attractive prices.
Global merger and acquisition (M&A) activity in the oil & gas sector over the year 2009 has mainly followed oil prices. Worldwide upstream deal count dropped from a high of 98 M&A transactions in the second quarter of 2008 to a low of 30 transactions in the first quarter of 2009, and then rebounded to 79 transactions in the third quarter of 2009 as oil prices stabilised above US$60 per barrel.
Post the economic nadir of March 2009, Asian NOCs, in particular those from China and South Korea, have been at the forefront of global upstream M&A activity. Year to date, Asian NOCs have made acquisitions totalling more than US$20 billion in value, the three largest transactions being Sinopec’s US$8.8 billion acquisition of Addax Petroleum, KNOC’s US$4.2 billion acquisition of Harvest Energy Trust and CNPC’s US$1.7 billion acquisition of Athabasca Oil Sands.
Asian NOCs, with their access to a wide pool of funding and the strong mandate from their governments, will continue to be very active buyers of exploration and production (E&P) assets and companies worldwide for years to come. In this part of the world, we should also expect to see continued M&A activity in Australia, in particular in connection with the numerous coal-seam-gas and liquid-natural-gas export projects being discussed there.
In North America, post-Suncor Energy’s US$20.5 billion acquisition of Petro-Canada in March 2009, ExxonMobil’s recent acquisition of XTO Energy for US$41 billion is also a precursor of a material increase in M&A activity in that region which will be driven by the improving global economic outlook, by the positive long-term outlook for oil & gas prices and by the drive to acquire unconventional oil & gas reserves.
If oil prices remain steady or continue to increase, the years 2010 and 2011 could become record years for oil & gas M&A activity in the upstream E&P end of the supply chain as the market turns bullish, buyers decide to make their move and the availability of capital from lenders improves.
Credit facility
If oil prices drop, there will be increasing pressure on distressed companies to sell and deals are likely to ensue, albeit at more subdued volumes.
An important swing factor for future M&A deal volumes will be the availability of credit. Although some banks have started to increase lending to the sector, in general it is still difficult to obtain credit to finance acquisitions. Therefore, higher volumes of M&A activity will be highly dependent on lenders willingness to open their purses.
The recovery of M&A activity in the oil & gas sector during the year 2009 has been led by E&P. However, as in previous cycles, the increase in upstream activity should start to feed-through into the oilfield equipment and services (OFS) sector.
Total OFS deal volumes fell to a 10-year low in the first quarter of 2009 but transaction volumes have started to pick up. The main M&A drivers here are a combination of over-leveraged distressed sellers combined with the highly fragmented nature of the industry which is ripe for consolidation.
This should represent significant growth opportunities for large cash-rich OFS companies. Singapore, with its multitude on OFS companies, in particular in the marine and offshore sub-sectors, should also witness increasing M&A activity, led by distressed sellers, consolidators and overseas players seeking to enter the growing Asia-Pacific market.
The outlook for M&A activity in the downstream refining and marketing end of the supply chain remains dim, in particular in Europe and in North America. These regions are likely to face chronic refining overcapacity as governments push through initiatives to lower greenhouse gas emissions, which will drive consumers to use increasingly energy efficient means of transportation.
In this environment of low refining margins and uncertain profitability outlook, buyers will remain on the sidelines unless asset prices drop to bargain levels.
The writer is executive director and head of Oil & Gas - Asia Pacific, Corporate Finance Advisory at Deloitte & Touche Financial Advisory Services Pte Ltd
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