China's major oil companies have been biding their time before embarking on a fresh round of takeover activity, but many experts feel the opportunities afforded by the current turmoil on global markets may be too good to ignore.
Valuations of oil and natural gas assets have fallen in step with stock markets, while a credit squeeze has put U.S. and European Union oil producers under pressure to conserve their balance sheets and freeze any acquisition plans for now. This has opened the door for the Chinese and rivals in India, which have amassed piles of cash during the oil price rally, are relatively debt-free, and need to buy oil reserves to grow. That said, political considerations may limit Chinese ambitions to bolt-on acquisitions of oil minors rather than transformational deals with the majors. PetroChina Co. (PTR), for example, had $9.5 billion dollars in cash on its balance sheet at the end of June, and would have access to finance from China's state banks, which have been largely unaffected by the troubles of their counterparts across the Pacific. China's largest-listed oil producer by capacity aims to replace all the crude that it produces over the next two to three years with new reserves. "Tightening of credit conditions for U.S. and E.U. companies may trim global valuations for hydrocarbon assets, which would be ideal for big spenders like PetroChina," said Bradley Way, a Beijing-based analyst at BNP Paribas. Stock markets around the world have been shaky since defaults in U.S. subprime mortgages triggered huge losses in the financial sector and dulled investor appetite for risk and new debt. Between July 19 and August 16, the Dow Jones Industrial Average in the U.S. fell 8.2%, and has only recovered a portion of those losses since then. Most indexes across Asia mirrored its decline. On Wednesday, Asian markets fell sharply again after the DJIA lost 2.1% overnight on evidence that credit woes have fed through into the wider U.S. economy. According to Prashant Gokhale, an analyst at Credit Suisse, the initial impact of the credit squeeze is already being felt in the oil sector through companies facing a higher cost of capital. A prolonged bout of market turmoil could lead to slower economic growth globally, trimming oil demand and hurting refiners and petrochemicals producers especially, he said. "If the current contagion continues it could throw up interesting mergers and acquisitions opportunities for companies with strong balance sheets," Gokhale said. "Extended market turmoil could help by bringing asset valuations down to levels where they become more realistic," he said. Cnooc Ltd. (CEO) is likely to be a key beneficiary of acquisition opportunities thrown up by prolonged market turbulence, along with its drilling unit China Oilfield Services Ltd. (2883.HK), which harbors ambitions of expanding further aboard, he said. | |
| Constraints Remain On M&A Ambition | |
When painted against China's need to offset stagnant domestic oil production with foreign oil, the acquisition schedule of PetroChina and domestic rivals Cnooc and China Petroleum & Chemical Corp. (SNP), known as Sinopec, seems oddly slow. Since the multibillion dollar takeover of the Udmurtneft unit of Anglo-Russian oil producer TNK-BP Holdings (TNBP.RS) by Sinopec in June last year, China's state oil trio have remained mostly on the sidelines as the wider oil sector has consolidated. Chinese companies accounted for just 5% of the $565.9 billion worth of deals involving energy firms globally last year, according to analysis firm Dealogic. Indeed, the total value of all deals involving Chinese energy companies last year - $27.3 billion - was just above the $23.3 billion double acquisition unveiled by U.S. oil producer Anadarko Petroleum Corp. (APC) last summer. Even if China's oil executives decide that now is the time to accelerate their acquisition schedule, analysts say they will be confronted by familiar problems, notably the reluctance of Western governments to allow the Chinese a tighter grip on global oil resources. The U.S. remains off the map for Chinese companies due to worries about the political opposition that would be stirred up in Washington should a takeover bid for a large-cap U.S. company be launched. The U.S. has just tightened laws on foreign investments, making them subject to greater scrutiny than before. Even comparatively benign governments appear to be taking steps to protect domestic firms against Chinese takeovers. Canada is looking again at its foreign investments policy, which may lead to the introduction of a national security review clause. Without the support of Western governments, China's oil companies have little freedom to make big acquisitions. This is a particular problem for PetroChina, which is vying with Royal Dutch Shell Plc (RDSA) and BP Plc (BP) for the rank of second-largest oil company in the world behind ExxonMobil Corp. (XOM). "PetroChina is an M&A candidate, but finding a target is difficult given its size," said Credit Suisse's Gokhale. China's companies may have to content themselves with mopping up smaller companies or individual assets as they become available, continuing a strategy in place since Cnooc's aborted $18.5 billion takeover campaign for California-based Unocal Corp. in 2005. Reports in Hong Kong media say PetroChina's parent China National Petroleum Corp. has bid $2 billion for the West African oil and gas assets of U.S.-based Devon Energy (DVN). People familiar with the situation have told Dow Jones Newswires that Cnooc and Zhenhua Oil are considering bidding for Transmeridian Exploration Inc. (TMY), which owns an oil field in Kazakhstan. In addition to political opposition, oil prices have stayed high and this is likely to prevent asset valuations from falling too far. Steven Knell, an energy analyst at consultancy Global Insight, notes that, while China's oil executives may be licking their lips at the prospect of falling asset prices, it's the country's own hunger for raw materials that may end up preventing a sharp decline. Another factor possibly discouraging Chinese companies from jumping now to take advantage of falling valuations is this autumn's Communist Party Congress in China, which is held every five years and determines the major promotions and demotions within the government's ranks. The chief executives of China's state oil trio are unlikely to risk damaging their political careers by launching an audacious acquisition move prior to the Congress, scheduled to convene on October 15. "The Chinese companies may be waiting until after October so they can get a political sanction to make an acquisition," Knell said. | |
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