Thanksgiving shock sets new paradigm; M&A markets to set new clearing prices
Brian Lidsky and David Michael Cohen, PLS Inc., Houston
At press time on December 15, oil prices continue to retreat rapidly, now below $57/bbl from $81.82 three months ago and from $100.56 six months ago. The descent began in earnest in late October and accelerated following OPEC's decision on Thanksgiving Day to maintain production and let the markets find equilibrium, with most analysts in the camp that the world is now roughly 1.0-1.5 MMbopd oversupplied with oil. Market reaction has been swift and producers are now forced to re-evaluate entire portfolios both to find cash for basic maintenance of existing production and to high-grade projects that survive stress tests of oil prices, some as low as $40/bbl at the wellhead. The ripple effect of a lower oil price paradigm will be felt throughout the entire energy sector from oilfield service companies to upstream oil and gas, midstream and LNG.
As expected, this rapid descent in oil prices has impacted the M&A markets as bid/ask spreads are simply too far apart. It will take some period of time for the M&A markets to get jump started again, with cash-rich buyers sitting on the sidelines circling for the best prices on both core assets and distressed assets that will be coming to the markets. Among those buyers on the sidelines, we certainly expect Asian NOCs and private equity firms to be stepping up. While the oil price descent has been rapid, most industry players with a long-term view have been through similar cycles-with the only question being how long will this downturn last.
PLS's latest deal data documents the slowdown. The US upstream deal count between November 17 and December 15 fell by almost half to 21 transactions vs. 38 during the previous month. For deals with disclosed values the drop was even more dramatic: to 10 from 24. Similarly, the international deal count fell to 32 transactions vs. 48 the previous month, or 18 new transactions vs. 25 prior in terms of deals with disclosed values.
For deal value, totals would be down if it weren't for continuing execution by one company: Apache. The US producer accounted for over 75% of the $3.2 billion in US deals announced and over half of the $5.3 billion in international deals. In the US, Apache announced the sale of non-core conventional Anadarko Basin and South Louisiana properties for $1.4 billion as well as YTD acquisitions totaling $1.0 billion across its unconventional growth plays. Backing out this activity by Apache (including deals that were likely struck earlier in the year), the most recent period would have just $540 million in disclosed US deal value, down 79% from $2.5 billion the previous month. These latest deals reflects Apache's commitment to the US onshore. Apache added 305,000 net acres, led by a 106,000-net-acre or 58% increase in the eastern Eagle Ford. Other acquisitions were in the Mid-Continent targeting the Canyon Lime, the Permian, Canada's Montney shale and multiple stealth plays, three of which the company plans to test in 2015.
Internationally, Apache agreed to sell its interests in the Kitimat LNG venture in Western Canada and the Wheatstone project off Australia along with associated upstream assets to Woodside Petroleum for $2.75 billion. Apache vowed to quit these high-capex, long-cycle projects back in July upon pressure from activist investor Jana Parnters. In Canada, Apache's Kitimat LNG project consisted of a 50% stake in the proposed 10 mtpa LNG plant (~1.3 Bcfd) and 460-km Pacific Trail Pipeline as well as 322,000 net acres of shale gas assets in the Liard and Horn River Basins of British Columbia. In Australia, Apache owned a 13% WI in the 8.9 mtpa Wheatstone project (~1.1 Bcfd) due online in late 2016 and a 65% operated stake in the associated Julimar-Brunello development which is expected to supply 20% of the gas feedstock.
Woodside has been looking for growth assets after turning down a chance to buy into Noble Energy's Leviathan gas project off Israel. Both Kitimat and Wheatstone have faced challenges including cost overruns and delays. However, it is worth noting that both Australia and British Columbia have enacted LNG tax regimes more favorable to exporters than the Israeli framework that proved to be a major sticking point in Woodside's Leviathan negotiations.