Oil Industry Slump May Herald Takeover Wave

By Brian Swint - Oct 6, 2011 7:52 PM GMT+0700

The oil and gas industry’s worst slump since the financial crisis heralds a surge of takeovers for Goldman Sachs Group Inc. and Sanford C. Bernstein Co. as Asia buyers put $150 billion in cash to work.

The market valuation of U.K. and North American exploration company reserves has dropped 23 percent this year to the lowest since 2008, Bloomberg data shows, while Brent crude prices gained 8 percent to $102 a barrel. The dislocation between crude and company valuations is “extreme” and may lead to twice as many deals as usual, Goldman said last month.

Asian buyers may spend $150 billion by 2016 to secure energy resources for their faster-growing economies and targets could include Tullow Oil Plc (TLW), Canadian Oil Sands Ltd. and Kosmos Energy Ltd., according to Bernstein. London-listed Premier Oil Plc (PMO) said it will seek more acquisitions after buying EnCore Oil Plc for $340 million yesterday.

“The valuations are pretty compelling if you believe in $100 oil,” said Christopher Wheaton, who manages RCM Ltd.’s $140 billion Energy Fund in London. “Once the economic uncertainty clears, we should see a pickup in deals. Asia still has the appetite because the security of supply issues haven’t gone away.”

The U.K.’s FTSE All-Share Oil & Gas Producers Index rose 4.3 percent as of 1:48 p.m. in London, compared with a 2.2 percent gain for the FTSE 100. Afren Plc, an explorer in Africa and Iraq, rose 6.8 percent, bringing its two-day gain to 12 percent, while Tullow increased 3.2 percent today.

Bowleven, Rockhopper

Explorers that need money for drilling next year may find it hard to get debt or equity funding if economies continues to deteriorate. That may help better capitalized companies looking to buy into projects and fields, Phil Corbett, an analyst at Royal Bank of Scotland Group Plc, said in a Sept. 23 note.

Among U.K.-listed companies, Africa explorer Bowleven Plc (BLVN) may be a target, while Cairn Energy Plc and Heritage Oil Plc (HOIL) have cash to make acquisitions, Corbett said.

Goldman analysts also identified Bowleven as a potential takeover target, as well as Falkland Islands explorer Rockhopper Exploration Plc (RKH) and Canada’s Bankers Petroleum Ltd. (BNK) in a Sept. 21 research note.

While Brent crude has dropped 13 percent since July, investors forecast prices staying above $90 a barrel for the next two years. That’s 10 percent more than its five-year average compared with the FTSE oil and gas producers’ index and the Standard & Poor’s Oil & Gas Index Exploration & Production Index both trading below their five-year averages.

Worst Since 2008

Global energy shares fell 21 percent in the third quarter, the worst three months since 2008.

The 20-member All-Share index of oil and gas explorers traded in London fell to 7273 last month, or 64.4 times the price of crude futures, the lowest ratio in three years. The benchmark has dropped 16 percent since July, while the U.S. oil index has dropped 30 percent.

The shares of 65 oil and gas explorers traded in London and New York have dropped an average of 21 percent this year, and the value of their reserves has slipped to $14.34 per barrel of oil equivalent from $18.60, the lowest since $9.85 in 2008, according to Bloomberg data.

Companies with fields large enough to be of interest to national oil companies and with assets mostly in one country are the most attractive, Goldman said.

M&A on Hold

The global volume of mergers and acquisitions among oil and gas companies was $47 billion in the third quarter, barely up from the $46.2 billion in the second three months in the year that was the weakest quarter since 2009.

The European sovereign-debt crisis and threat of a U.S. recession have erased more than $9 trillion from global equities since July 1, Bloomberg data show, and the MSCI All-Country World Index has slumped 19 percent during the period. Concern that the global economy will slip back into recession may still hold back transactions.

“There’s a pipeline of deals that have been on hold,” said Christine Tiscareno, an equity analyst at Standard & Poor’s in London. “I don’t think there’s going to be a boom in M&A now, it will just go back to more normal levels.”

Spending on acquisitions may not increase until next year, Wheaton said. Asian buyers may focus on purchasing assets rather than companies, Bernstein said.

The biggest deal of the third quarter was BHP Billiton Ltd. (BHP)’s acquisition of Petrohawk Energy Corp (HK) for $15 billion in July. China Investment Corp. bought a 30 percent stake in GDF Suez (GSZ) SA’s oil gas production and exploration subsidiary for $3.2 billion in August, and Cnooc Ltd. (883), China’s biggest offshore oil producer, agreed to acquire Opti Canada Inc. (OPC) for $2.1 billion to expand in oil sands.

Buyers would favor companies in the U.K. and Canada, which usually have lower exploration premiums built into their valuations and are cheaper in terms of reserves per barrel of oil, Bernstein wrote. These countries, unlike the U.S., also don’t have very strict restrictions on acquisitions by Asian national oil companies, according to the analysts.

To contact the reporter on this story: Brian Swint in London at bswint@bloomberg.net

To contact the editor responsible for this story: Will Kennedy at wkennedy3@bloomberg.net