A new M&A supercycle?
The rush to export liquefied natural gas from North American shores will help drive asset deals, mergers and acquisitions in 2013, part of a wave of global consolidation led by cash-flush national oil companies that could see several Canadian companies taken out.
Watch for “bigger and bolder” moves by state-run behemoths this year, “as the share of oil and gas consumption by Asian countries continues to rise and pressure on Asian NOCs to ‘go global’ increases,” said Neil Beveridge, a senior analyst at Sanford C. Bernstein in Hong Kong.
Globally, deal values climbed to a record US $260billion last year, compared to an annual average of US $150billion since 2005. National oil companies, or NOCs, were responsible for roughly 25% of the total, or US$60-billion, Mr. Beveridge said in a Jan. 14 report.
The surge, which includes the $15.1-billion acquisition of oil sands producer Nexen Inc. by China’s CNOOC Ltd., could well be a harbinger of things to come, Mr. Beveridge contends. Led by state-run Asian companies, history may be poised to repeat itself as factors that helped trigger more than US$500-billion in M&A activity between 1998 and 2001 — creating the likes of Exxon Mobil Corp. and ConocoPhillips Co. — emerge anew.
Then, as now, large-cap oil and gas stocks were languishing amid flat or declining oil prices, Mr. Beveridge pointed out. Companies sought to increase historically low returns on capital through costcutting and scale.
But while those deals were orchestrated from head offices in Houston and Calgary, today’s purchases are led increasingly by NOCs, which continue to grow their production, reserves and influence at a faster clip than their Western counterparts.
“In short the market share of global reserves and pro- duction of western oil majors continues to decline,” Mr. Beveridge said.
“As Asia’s share of global consumption of oil and gas increases, we anticipate that M&A will continue to increase for Asian NOCs as the shift in asset ownership from west to east continues.”
Canadian companies including embattled natural gas producers Encana Corp. and Talisman Energy Inc., as well as oil sands-focused Canadian Natural Resources Ltd., are potential targets, Mr. Beveridge said in the report. All have posted negative total shareholder returns over the past three years, he calculates, with Encana shareholders faring the worst.
Each has an enterprise value (market capitalization plus debt) in the range of US$10-billion to US$50-billion, Mr. Beveridge said, making them attractive to potential suitors.
Encana is not for sale, interim chief executive Clayton Woitas said in an interview Jan. 14. Talisman spokeswoman Phoebe Buckland said the company is not pursuing a sale. Canadian Natural Resources declined to comment on the likelihood of a sale.
Outside of North America, Mr. Beveridge thinks LNG assets in western Australia, plus oil and gas properties in East Africa, the semi-autonomous region of Kurdistan and potentially deepwater parcels offshore Brazil could vie for attention in 2013.
In Canada, the focus will be on British Columbia, he said. Encana is marketing two joint venture packages in Western Canada following a $1.18-billion partnership struck with PetroChina subsidiary Phoenix Duvernay Gas late last year on a prospective shale play in Alberta.
“I expect them to have some other [ joint venture] announcements in 2013, in Canada and the United States,” BMO Nesbitt Burns analyst Randy Ollenberger, who rates Encana the equivalent of a buy, said in an interview Jan. 11.
Natural gas - weighted companies are not off-limits to state-owned enterprises under Ottawa’s new investment rules.
The investment guidelines, introduced after the sale of Nexen to CNOOC, prevent NOCs from taking controlling interests in oil sands companies, a provision that could inadvertently open the door to more joint ventures and asset deals focused on natural gas.
Last year’s sale of Progress Energy Resources Corp. to Malaysia’s Petronas clears the way for “highly selective consolidation” by NOCs and their international counterparts in northeastern British Columbia, according to FirstEnergy Capital Corp. analyst Cody Kwong.
Jockeying underway in the westernmost province by LNG proponents seeking long-dated reserves to backstop export plans could see Painted Pony Petroleum Ltd. bought, he says.
Prospective buyers “looking for highly contiguous tracts of land in areas already delineated as hosting amongst the most prolific Montney gas resource in the basin and situated within the most favourable royalty window in NEBC will arrive at Painted Pony as being the company that fits this bill the best,” Mr. Kwong said in a Jan. 7 report.
Chinese NOCs could be on the hunt for more gas assets in Western Canada, but not because new investment guidelines prevent them from buying majority stakes in the oil sands, said Wenran Jiang, a senior fellow at the Asia Pacific Foundation of Canada and senior advisor to the Alberta energy department.
Even before the federal government introduced the new rules, he said, Chinese companies were looking beyond the oil sands. “They feel the oil sands projects are too large in pre-capital investment and take too long to get to the market,” Mr. Jiang said, adding that CNOOC liked Nexen’s global footprint more than its beleaguered Long Lake oil sands project.
Chinese NOCs “have already shifted, even before Nexen, to basically focusing more on conventional oil and gas and shale” in Western Canada.
Perceived delays in building export infrastructure are “very discouraging” and could have a “slowing down impact” on NOC investment in Western Canada, Mr. Jiang added, as state-run companies look elsewhere for opportunities.
“We’re not the only player,” he said. “The world is seeking Chinese investment and courting them heavily.”