• Big Oil back on the acquisition trail as outlook brightens

    The world’s top oil companies are back in acquisition mode, targeting smaller exploration and development firms to boost oil and gas reserves rather than the mega-mergers that followed previous slumps in crude prices.

    Since late November, major oil companies have announced 11 deals worth more than $500 million each with a combined value of $31 billion, the clearest sign yet that oil executives are more confident a recovery is underway.

    When crude prices collapsed in the second half of 2014, large oil firms slashed spending on exploration and production and offloaded assets to reduce debt so they could cope with lower revenue from oil and gas sales.

    But with crude reservoirs declining at a rate of 10 percent a year in some cases, major oil companies are now looking to snap up assets to start growing again and there are plenty of smaller firms burdened with debt looking to sell.

    “You’re seeing the majors sharpening their pencils after a long while and actually flipping around from disposals to acquisitions,” said Tony Durrant, chief executive of British energy firm Premier Oil , which is looking to sell several stakes in its North Sea operations.

    Total acquisitions of oil and gas fields, known as upstream assets, tripled to $31 billion in December from a month earlier, when the Organization of the Petroleum Exporting Countries agreed to cut output for the first time in eight years, according to data from consultancy Energy Market Square.

    Deals in the last month of 2016 alone accounted for nearly a quarter of total activity during the year.


    BP announced a string of investments in the last two months of 2016, including a $1 billion partnership with Dallas-based Kosmos Energy in Mauritania and Senegal in West Africa, as well as acquisitions in Abu Dhabi and Azerbaijan.

    The British company also spent $375 million on a 10 percent stake in Eni’s giant Zohr gas field in Egypt while Russian oil giant Rosneft bought 30 percent stake of the same field for $1.575 billion.

    France’s Total and Norway’s Statoil bought into Brazil’s lucrative sub-salt deepwater oil fields while ExxonMobil Corp bought assets in Papua New Guinea to meet growing Asian demand for liquefied natural gas.

    The trend continued in January with Total boosting its stake in Uganda’s Lake Albert oil project by snapping up most of Tullow Oil’s stake for $900 million.

    ExxonMobile and Noble Energy also struck deals worth nearly $10 billion combined for a larger slice of the Permian Basin, the largest U.S. oil field.

    While deal making outside the United States almost ground to a halt at the start of 2016, acquisitions in North American shale basins have continued at a steady pace.

    In the Permian Basin, for example, the time it takes to produce oil and gas after an initial investment is far quicker and cheaper than developing conventional fields over three to five years.


    More deals are likely this year as the large overhang of crude oil in the world that has weighed on the market since 2014 continues to clear and oil prices rise.

    “When you can cut capex (capital spending), two-and-a-half to three years later you see production decline and reserves depleting and you have one choice only and that is going after high quality resource,” said Sachin Oza, co-manager with Stephen Williams of the Guinness Global Oil and Gas Exploration Trust.

    “If you’ve not spent any time filling your hopper with these opportunities that take five years to build up, there is only one choice: you have to buy them,” said Oza.

    The Guinness Trust is a fund that invests in firms in the early stages of exploration or development of energy resources which it believes will attract investment from oil majors.

    Investors reckon large firms will focus on underdeveloped basins in east and west Africa, Romania and Albania, as well as nascent Latin American reserves in places such as Colombia, all areas where the growth potential is seen as greater than in established regions such as North America and the North Sea.

    While slides in oil prices typically unleash a wave of takeovers, companies emerging from the current downturn are generally shunning outright acquisitions and instead looking at specific deals for specific fields.

    After a prolonged period of low oil prices in the late 1990s Exxon merged with Mobil, Total merged with Elf Aquitaine and Petrofina, Chevron bought Texaco, BP snapped up Amoco and ARCO and Conoco and Philips merged.

    This time round, the only stand-out acquisition has been Royal Dutch Shell’s takeover of BG, which was announced in April 2015 and completed in February a year later for $53 billion.


    As large oil firms are wary of increasing their debt burden at this point, investors say corporate acquisitions are likely to be limited in numbers and scope but oil field assets are very much in the crosshairs.

    Oil majors are opting for joint ventures to develop specific fields in complex deals, such as share swaps or deferred payments, to lower their risk and limit the amount they need to spend upfront following two years of budget cuts.

    “The international (ex-U.S.) asset market is a buyer’s market, as sellers continue in balance sheet preservation mode,” said Charles Whall, energy portfolio manager at Investec Asset Management.

    “European majors, which already have large dividend commitments, are unwilling to use equity for assets without immediate cash flow … Most of these asset deals are structured to minimise the debt impact in the near term,” he said.

    Such deals also mean the sellers can retain a stake in the assets as their value rises with oil prices, said Oza and Williams at the Guinness Trust.

    Analysts say for much of 2015 and 2016 there was subdued activity because buyers and sellers were too far apart on price.

    Buyers hunting for bargain-basement deals were frustrated by sellers holding out for better terms but as oil prices have started to stabilise there has been more convergence.

    According to Martijn Rats, equity analyst at Morgan Stanley, most of the deals announced in recent months have been based on a long-term oil price of about $60 a barrel to $65 a barrel.

    While that is significantly lower than before the collapse in oil prices from a 2014 peak of $115 a barrel, it is still above current long-term oil price forecasts, Rats said. DeSean Jackson Womens Jersey

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