UBS’s sector view Oil & Gas, GKP,AFR,OPHR,LEK,TLW,RKH,SMDR,SEPLAT,BG
in 2013 finding costs (2C) hit a record level of $4.40/boe but a soft asset market meant
reserve acquisition costs were subdued at $4.00/boe (2P). We posited this should, at
the very least, spark some boardroom debate about whether it is cheaper to drill on
Wall Street? Recent events have shown some industry participants are reaching their
own conclusions. This month we have seen: Glencore acquire Chad focussed Caracal
for $1.35bn (61% premium); Roc Oil & Horizon Oil merge to create an $800m new
player; PTTEP purchase Hess’s Thai business for $1bn; Ophir’s rebuffed merger with
Premier Oil; plus today’s $1.6bn take-out of Heritage Oil by a Qatari backed vehicle.
IOC’s and NOC’s are stepping back from the market with focus on ‘capital discipline’
manifesting itself in myriad asset divestment packages. This, following a sustained
period of E&P equity market underperformance (-40% since 2012) has seen a buyers’
market for assets emerge. Financial buyers are entering the fray to take advantage. The
trend towards E&P mergers likely reflects attempts by management to add scale, bring
down costs of capital and reduce vulnerability to corporate activity.
Recent years have seen a downturn in international upstream M&A, contributing to loss
of confidence in the E&P sector. Recent deals, though, highlight value arbitrage
between the asset and equity markets, the emergence of new pools of capital willing
and able to take advantage of this and, vulnerability of ‘beaten-up’ independent E&P’s
with high quality assets. So who might be next? We see the industry’s focus on
material conventional oil (Lundin; SEPLAT) and LNG scale gas (Ophir). Kurdistan (Afren;
Genel; DNO; GKP) and emerging African basins (Tullow; Africa Oil; Lekoil) provide
access to undeveloped oilfields. Financial buyers are likely to prefer focussed, nonoperated
positions (Eland; Rockhopper). M&A always remains possible for smaller assets
with strategic local value (Salamander). If and when an IOC decides to ‘drill on Wall
Street’ it will need scale (BG; Tullow; Lundin) – and unlikely to be an isolated event. |
