Mergers and Acquisitions in the Oil and Gas Industry
Current upstream M&A issues and transaction considerations
This whitepaper sets out the upstream O&G environment in the Middle East North Africa region, the M&A issues that face investors looking to transact here, and how these are being managed through the screening, diligence and valuation phases of the transaction.
Whilst global oil and gas (O&G) transactions have suffered a modest decline in both deal count and total value in the first half of 2012, we have seen increasing merger and acquisition (M&A) interest by MENA-based exploration and production (E&P) companies and investors looking to utilise excess cash to fund geographical expansion which in a number of cases involves the acquisition of financially distressed assets.
In recent months, the MENA region has seen some significant developments and opportunities for upstream M&A. The final withdrawal of US troops from Iraq, the end of the Libyan civil war in 2011 and regime change in Egypt signaled increased optimism around the supply of oil, especially as nations that are importing move away from Iranian oil, as a result of the US embargo.
Libya is now poised to return to full-scale oil production in the not-too-distant future and Iraqi production, which has now passed the 3 million barrel per day level, is benefiting from foreign investors with the expertise to exploit these resources. The question remains as to whether these nations will achieve optimum production levels or whether they will continue to face constraints due to outdated infrastructure, political challenges (such as in Iraq), policy uncertainty and continued security threats.
North African countries are seen to be returning to the ‘business as usual’ mode, in the post Arab Spring climate with an increase in foreign investments, especially in Egypt and Libya. Legacy risks remain, however, as off-take contracts with national oil companies (NOC) continue to experience disruption during the transition period of governments with E&P companies in the region facing significant challenges to working capital management.
Further afield, more unconventional sources of hydrocarbons, such as US shale gas exploration, oil production from the bituminous sands in Canada and deep water production in Brazil’s pre-salt blocks, have provided new opportunities and a recent surge in interest from international oil companies (IOCs). The bid for Nexen by CNOOC highlights the continued appetite for these alternative asset types.
Whilst a number of factors, including low US natural gas prices and relatively high production costs in these areas, have raised uncertainty around future development and capital deployment, this may present opportunities, particularly for larger foreign companies with the required technological resources, to acquire these assets at low prices.