Chinese Energy Giants will continue Overseas BuyOuts again
![Chinese Energy Giants will continue Overseas BuyOuts again](http://cdn3.scmp.com/sites/default/files/styles/486x302/public/2015/10/18/21d0a0f16c07a28dc429b946ee29031f.jpg?itok=oU6SkM5o)
Overseas acquisitions by state-backed oil and gas giants are expected to pick up soon from a multiyear low blamed on a continuing corruption crackdown and a sharp fall in oil prices that have weakened their financial positions, according to analysts and deal advisers .
With oil prices lingering at near-six-year lows in the past two months, a string of small to medium-sized private-sector companies in the West, especially in the United States, have buckled under pressure from creditors and have had to put assets on the block to raise funds to repay debt, or file for bankruptcy protection .
But according to data compiled by deals information provider Dealogic, Chinese oil and gas companies made outbound acquisitions worth only US$2.35 billion in the first nine months of this year, 25.5 per cent less than in the same period last year, and much less than the US$8.7 billion to US$25.6 billion recorded in the corresponding periods of 2010 to 2013. In the third quarter alone, the deal volume of US$450 million was just half that of the same period a year earlier.
In contrast, outbound acquisitions by Chinese companies in the year’s first nine months surged 23.7 per cent year on year to US$67.5 billion, a record high for the period, according to Dealogic. The top growth drivers were the financial, automotive, technology and real estate sectors.
“The acquisitions slowdown has been caused by the corruption crackdown, which has paralysed decision-making in the board room,” said Neil Beveridge, a senior oil and gas analyst at Sanford Bernstein. “On top of this, debt levels are far higher than in the past and there is an increasing focus on returns over growth.”
But Beveridge said overseas acquisitions were expected to pick up, given the mainland’s heavy reliance on energy imports, although policy changes meant deals would no longer be done primarily by state-backed giants.
More investment by the private sector was likely, with Beijing expected to soon unveil policies to facilitate such participation in sectors dominated by state entities, such as oil and gas.
Lawrence Lu, a senior director of corporate ratings at Standard & Poor’s, said oil companies’ production cuts had not been as big as expected, particularly in the US, partly because capital markets had been supportive amid the industry downturn and partly thanks to lower capital expenditure and cost-cutting.
“If oil prices remain at low levels for a long period, more companies will have to cut production and sell assets in order to protect their credit health,” Lu said. “If the asking prices are attractive, Chinese firms could buy, since the nation’s oil-import reliance has surpassed 60 per cent, which makes energy-security enhancement a long-term strategy.”
Top managers at the three state-backed giants have a range of views on the best timing for acquisitions.
The chairman of offshore producer CNOOC, Yang Hua, said in August the level of oil prices should not be the main factor when pursuing overseas acquisitions. “Acquisitions can be done at both high and low oil prices,” he said. “The key to a successful one is whether value can be created, or, whether an asset can be managed better in the buyer’s hands.”
In March – when oil was trading at about US$47 a barrel, similar to current levels – Fu Chengyu, the then chairman of China’s No2 oil and gas producer China Petroleum & Chemical Corp (Sinopec), said that if oil prices continued to linger between US$40 and US$60 for six more months, it would be time to consider overseas acquisitions, as some companies would be under tremendous financial stress and would have to sell assets.
Wang Dongjin, the president of PetroChina, the country’s largest oil and gas company, said in August low oil prices created “very favourable” opportunities for acquisitions, and the oil giant was close to an agreement in talks on an asset swap with an unidentified international oil company.
In March, he had said PetroChina was in talks on swapping its expensive-to-extract unconventional oil and gas assets in Canada with the assets of an international peer.
Wang said PetroChina was also a seller of assets, having sold an up and downstream integrated oil asset in Algeria and a stake in an oil field in Kazakhstan in the first half of the year, as it continued to rationalise its overseas asset portfolio to lift efficiency.
Share and assets swaps were also mentioned by CNOOC in March as ways it could improve profitability. A spokesman said the integration of Canada’s Nexen, which it bought in 2013 for US$15 billion, was still the focus of CNOOC’s overseas development, although it would not rule out buying more assets.
Deal advisers said some signs of a pickup in outbound acquisitions had emerged recently.
Hilary Lau, a partner at law firm Herbert Smith Freehills who advises buyers and sellers of oil and gas assets in the region, said: “We see greenshoots emerging as oil prices seem to be stabilising around a steadier range after falling sharply. This is making some assets more attractive, and long-held plans are being executed.”
Stephen Kitts, a managing partner at law firm Eversheds, said senior managers at the state giants had become cautious about doing deals “simply because people were uncertain what the anti-graft campaign is about”.
“The feedback we are getting now from Beijing is that opportunities are beginning to emerge again,” he said, adding that his company was advising a state-backed group on its bid for a stake in a business in South America, as well as a Chinese consortium potentially investing in a major oil and gas asset in Africa.
Charles Butcher, an Eversheds partner specialising in mergers and acquisitions, said co-investment by state-owned and private enterprises in the same project had been relatively rare in the past, but it was happening now and might become a trend.
Such a structure could help improve governance of the deal-making, he said, since an experienced private-sector partner could bring “additional rigour and discipline to the process”.
“One of the issues some state companies have had in their offshore investments has been, from time to time, arguably overpaying for assets,” Butcher said.
“In these instances, the strategic case may have overwhelmed the usual checking process that ensures there has been a vigorous cost-benefit analysis, and that you have priced the deal appropriately in a purely commercial sense.”
Tom Deegan, a partner and a mergers and acquisitions specialist at law firm Sidley Austin, sounded a noted of caution.
“While we are witnessing a rise in activity during the remainder of the year and next year, I do not expect deal volumes to go back to 2012 levels anytime soon,” he said. “Due to changing global economic conditions, a shift in Beijing’s policies for the energy sector and the recent anti-graft probes, dealmakers appear to have become more cautious.”
Deegan said industry bosses expected private companies would be a key part of overseas energy-acquisition deal-making in the coming decade, given Beijing’s reform initiatives to promote the private sector. But with their lack of overseas acquisition experience, they would be likely to seek to co-invest with the state majors, he added.
Published in SCMP.com