Energy companies, including some of the world’s biggest, could be forced to slash prices of more than $110 billion worth of assets they want to sell after dealmaking in oil and gas fields ground to a halt due to the volatile crude market. The values that buyers and sellers assign to assets, largely based on their view on the future oil price, drifted far apart in the past year, according to several industry bankers. Asking prices have been as much as 50 percent higher than what buyers are willing to pay in the era of cheap oil, although some bankers believe the gap is now narrowing again as crude prices rally, and activity is showing signs of picking up. Oil majors including Royal Dutch Shell, Chevron and BP are offering assets to balance their budgets and maintain lavish dividend policies. For smaller companies with heavy debt burdens such as Tullow Oil, Genel Energy or Enquest and U.S. shale producers, the need for cash can be even stronger. Around 146 assets worth more than $100 million each are on the block worldwide, according to data compiled by consultancy 1Derrick. It puts their total value at $113 billion, although any estimate remains notional until buyers and sellers come to terms. They include Chevron’s Gulf of Mexico oil fields, North Sea assets owned by Italy’s Eni, Shell and France’s Total as well as a myriad assets in Africa and Asia. “Deals have been elusive because buyers are both few in number and highly cautious,” said Bobby Tudor, Chief Executive Officer of U.S. investment bank Tudor, Pickering, Holt & Co. Business involving energy infrastructure remains buoyant. Even at low prices, pipelines are needed to move oil and gas while demand for storage is strong as sellers hold onto crude and products, hoping the market will pick up. It is selling oil and gas still under the ground that is problematic. The rapid rise in recent years of “unconventional” production, largely from U.S. shale deposits, plus a determination by major OPEC producers such as Saudi Arabia to defend their market share has kept the energy market weak. Prices of the U.S. benchmark West Texas Intermediate (WTI) have recovered from lows near $27 a barrel in January to around $44 now for the prompt trading month, currently June. However, they remain far short of levels above $110 before the collapse began in mid-2014. In the United States, buyers are still unwilling to value assets at prices much above the oil price curve as measured by forward contracts, Tudor said. Known as the strip, this currently values WTI at around $53 a barrel in 2020. Tudor believes the market needs to rise only a little and stay there for mergers and acquisitions deals to pick up. “If we can get the prompt month for WTI stabilized in the high $40s and the 2020 price at $55 or higher, the M&A market will come alive,” he said. U.S. shale production is now declining with lower investments, and dozens of huge oil and gas projects have been scrapped around the world. Nevertheless, closing asset deals remains elusive, according to one potential buyer. “Did the bump up from $27 a barrel to the $40s suddenly change the pace of industry dealmaking? I am not seeing that,” said Arun Subbiah, Founding Partner at Petroleum Equity, an upstream oil and gas private equity firm focused on the North Sea and onshore Europe.
“People are still looking at the macro: (oil) inventories are still very high, U.S. unconventional production is slowly coming down but is still stubbornly high and people will want to see that before the industry believe the recovery is taking place.”
While volatility heightens caution among both buyers and sellers, the rally and signs of slowing global production appear to confirm expectations of a recovery by the year-end, bolstering dealmakers’ confidence, according to some analysts and bankers.
“The valuation gap is closing. If prices stay in the $40-$70 band it will not change people’s fundamental expectations on where the market is going,” said Andy Brogan, Global Oil & Gas Transactions Leader at consultancy EY. “A number of people are looking very seriously at buying assets so (volatility) doesn’t seem to be stopping an uptick in processes.”
Nevertheless, a major movement on the market could still upset things, he added.
In a survey of industry executives conducted by EY, 88 percent said they had failed to complete or cancelled a planned acquisition over the past year. But 58 percent expect the deal market to improve over the next 12 months.
BP, like its peers, has announced large sale programmes to offset growing debt while maintaining a generous dividend policy.
BP Chief Financial Officer Brian Gilvary said last month that the group was also looking at buying, preferably assets it can operate, but noted the difficult conditions.
“It is tough to find things which are value accretive in the current market and there are lots of assets out there right now,” he said in a call to analysts following BP’s first quarter results. BP is also considering swapping assets, he added.
Shell’s plan to sell $30 billion of assets by 2018 following its $50 billion acquisition of BG Group in February is the most ambitious in the market.