With the £1.7billion takeover of Aberdeen-based Dana Petroleum by the Korean National Oil Company (KNOC) now all but complete, the purchase sheds light on an increasing phenomenon in oil and gas – the growing prevalence of National Oil Companies (NOCs).
There are more than 60 at present and whilst all have some degree of state control over their activities, there is enormous variation in the roles that these enterprises play in both their domestic markets and in the wider oil market.
Rapidly developing economies are supply constrained and demand ascendant, leading to NOCs moving away from their previous nationalistic role as licensing agency and passive partner.
They are now becoming active in developing and acquiring equity positions, and resources in the international arena both upstream and downstream.
NOCs are now active in up to 30 oil producing countries, and are adding economic rents even further by increasingly dealing with one another directly, rather than simply on a government to government basis.
They are, in effect, becoming international national oil companies, a challenge in itself.
Indeed, Asian state-owned energy companies remain thirsty for energy supplies and are willing to pay well over market price to secure reserves.
As we saw with the Dana takeover, the gap between market valuations of oil and gas assets, and the price that strategic buyers have shown a willingness to pay, is also attractive for those who arbitrage in the mergers and acquisitions market (that is, hedge funds).
Sovereign Wealth Funds and state-owned companies value assets differently from the equity market and are prepared to pay a premium given their long-term view.
As we saw, KNOC successfully paid £18 a share for Dana, with the share price before the approach trading around £11, and Dana’s independent valuation of the business put at around £24.
At £18 a share, this was around 20% more than analysts’ average price target for the stock pre the approach.
The last few months have seen a significant rise in merger and acquisition activity.
According to data produced by Dealogic, oil and gas M&As for the year-to-date rose by 50% compared with the previous 12 months.
The long-term context is that Asian state-owned companies like China National Oil Corporation and KNOC need to buy exploration companies to secure energy reserves.
A further factor is that a relatively stable oil price makes it easier for acquiring companies to value targets.
In recent months, oil prices have stayed at a level roughly between $70 and $80 compared to 2008/9 where the range was $150 to $40.
Many industry analysts and experts believe that these factors mean that there is significant scope for continued deal-making activity.
They expect large and state-backed oil companies to focus on targets with a presence in West Africa, where a combination of low regulation, recent oil and gas discoveries and a plethora of small firms create an environment conducive to deal making.
Companies like Tullow Oil and Premier Oil, both UK-listed independents (like Dana), have a strong presence in this region, with both mooted as potential targets in the future.
Mark McCue is a divisional director with investment manager and financial planning specialist Brewin Dolphin in Aberdeen.
Past performance of shares is not a guide to future performance.
The opinions expressed in this article are not necessarily the views held throughout Brewin Dolphin Ltd.
No director, representative or employee of Brewin accepts liability for any direct or consequential loss arising from the use of this document or its contents.
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