Cashed-up Asian NOCs are actively screening international assets and companies for once-in-a lifetime acquisition opportunities amidst the global downturn.
Asian NOCs were particularly cautious through the last oil price downturn, but they now have an “outstanding opportunity to launch aggressive counter-cyclical bids to grow their international portfolios, fill strategic gaps and make decisive moves to ensure growth post-crisis,” said Gavin Thompson, Asia Pacific vice-chairman at Wood Mackenzie.
Given the plentiful opportunities to access some of the highest quality plays globally, Thompson reckons that deals will be done over the coming months by Asian NOCs.
For companies of the scale and financial strength of the Chinese NOCs and Malaysia’s Petronas this effectively offers a once-in-a lifetime opportunity, he added.
Indeed, some of the NOCs are already linked to possible deals in the near term. “CNOOC, for example, is rumoured to be considering acquiring stakes in a Kenya oil project, where both Tullow Oil and partner Total could be seeking exits,” Readul Islam, an Asia upstream specialist at Rystad Energy, told Energy Voice.
However, while business development teams at cash-rich companies are scouring the globe for potential fire-sale deals, pulling the trigger will require a willingness to be bold, cautioned Islam. “This will perhaps be even more so relevant to Asian NOCs, where decision processes tend to be quite top heavy,” he said.
Moreover, several Asian NOCs, particularly Thailand’s PTTEP and Indonesia’s Pertamina, have recently completed a flurry of domestic additions to their portfolios, which means they will be more cautious about further deals.
Nevertheless, for the stronger NOCs, identifying attractive acquisition opportunities will not be a major problem, but closing the best deals could be more challenging, warned Thompson. This is not just about the differences in price expectations between buyers and sellers, but also about where those opportunities lie.
For Chinese NOCs in particular this could be an issue. “Many US tight oil producers are financially distressed, but US upstream investment is a non-starter for China right now. Australia has opportunities, though again the current political environment may make it more challenging for Chinese NOCs to acquire. For many, Europe is largely too mature, Canada perhaps too expensive and carbon-intense. Even Brazil may be somewhat cool to new Chinese investment,” said Thompson.
Still, a raft of outstanding opportunities remain. “Whether it be world-class deepwater plays in Latin America and West Africa, discovered resource opportunities in the Middle East, pre-FID LNG or asset divestments by the Majors, the Asian NOCs have the scope and financial firepower to think big,” added Thompson.
Service companies could also help NOC capability gaps and support upstream opportunities that might otherwise have been too ambitious.
“Companies may also look beyond upstream altogether, with investment in international downstream supporting integration across the hydrocarbon chain, including petrochemicals. And while most Asian NOCs remain committed to the traditional oil and gas business model, there is nascent interest in renewables, as low oil prices reduce upstream returns to levels similar to wind and solar projects,” said Thompson.
Unlike the IOCs, many Asian NOCs have stated they will strive to keep domestic investment at pre-crisis levels to help prop up economies via employment, tax revenues and dividend payments. Indeed, as Thompson points out, many Asian NOCs have robust balance sheets and access to affordable capital through state-owned banks, helping maintain investment where others cannot.
Petronas even raised $6 billion last month from a bond offering that marks its return to the international US dollar bond markets since early 2015. The offer was six times oversubscribed, signalling companies still have the ability to raise money in this economic environment.
While some view going to the market to raise funds as an act of desperation and a need for capital, this is usually not the case. Raising debt helps companies, such as Petronas, who need access to liquidity as soon as possible, to buy time while cost cutting measures are implemented. Low interest rates also provide a great opportunity to access cheap finance. And lastly, a successful debt raise signals to the market that a company is financially sound.
But it is unclear if robust balance sheets and affordable capital will translate into a flurry of international deals yet. Although the opportunity and timing for transformative deal making will never be better for Asian NOCs, it remains to be seen if their leaders have the willingness to embrace risk in the current climate. However, those that do will surely be rewarded post-crisis.