Asian firms on the lookout for acquisitions hoped the steep drop in oil prices would create new opportunities, but dealmakers say oil price volatility and senior managment changes at China's national oil companies have taken the gas out of the sector's regional M&A activity.
Outbound oil and gas M&A for Asia ex-Japan has slumped to $1.7 billion year-to-date, compared to $3.6 billion for the period a year ago, according to data provider Dealogic.
Globally, mega deals have shown signs of resurgence with Shell agreeing to buy BG group for $70 billion in April, but deal flow involving Asian buyers has remained muted.
"Volatility in oil prices has caused uncertainty among would-be buyers and sellers, resulting in a slowdown in oil and gas M&A activity," said David Blumental, partner at Latham & Watkins who advises on oil and gas deals. "Sellers have been hoping for a rebound in oil prices and with oil prices moving around, it has been hard for buyers and sellers to reach an agreement on price," he added.
Benchmark Brent Crude prices dipped below $100 per barrel last autumn and haven't looked back, with prices now hovering around $65 per barrel. West Texas Intermediary, the other major oil price benchmark, has clocked similar declines.
Meanwhile, China's unwieldy state oil giants, several of which have been caught up in corruption probes of officials, have seen new managment come aboard. State owned giants CNPC, Sinopec and Cnooc all appointed new chairmen in May. According to one Asia-based M&A banker, the state-owned energy majors are not taking meetings with bankers, an indication they are trying to get their strategy in place.
At Sinopec, Wang Yupu who spent most of his career at the Daqing oilfield, one of China's most prolific, was brought in to replace Fu Chengyu as chairman of Sinopec. Wang is viewed as an outsider without a deal-making pedigree. Oil and gas bankers therefore expect it could take some time before Sinopec to resume an acquisitions programme.
"Management and other changes in the Chinese oil companies have also contributed to the slowdown in deal activity,” Blumental added.
Second tier activity
While the bigger SOEs are likely to go quiet as they sort out strategy, dealmakers say smaller firms could take up the slack. “We are unlikely to see a lot of activity from the big three Chinese [energy] companies but the second tier oil and gas companies are getting more active,” said the Asia M&A banker.
One example of smaller players stepping up would be Hong Kong-listed China Oil and Gas, which acquired Calgary-based Baccalieu Energy for $236 million last year and is in talks with several banks over potential targets, the banker added.
While China's SOEs are in quiet mode, advisers say teams at the big three continue preparing deals in anticipation for the time when leadership settles in and is ready to look at the deal pipeline again.
"It is a good time for deal teams at China SOEs to be looking at assets because of the lower oil price, allowing them to move quickly if the assets fit within their strategy," said Hilary Lau, a partner at Herbert Smith Freehills who advises on oil and gas deals.
The plummet in oil prices has also attracted a broader array of investors.
"We have seen buying interest from Chinese funds that traditionally were investing in real estate and other sectors," Lau added. "Real estate prices have been falling recently, therefore some of them see opportunities within oil and gas".
In Southeast Asia, dealmakers expect that asset sales could be driven by smaller oil and gas service providers that are financially stressed.
“Given where oil prices are, there could be more M&A in that sector,” said Alvin Lim, head of banking advisory Southeast Asia at HSBC. “Some of the independent oil and gas services companies that are leveraged and under pressure could be more open to a sale”.
According to Herbert Smith Freehill's Lau, several oilfield services companies including those that provide drilling rigs and ships are facing financial stress.
"There is generally an oversupply of oil support vessels and services and some of them will require further funding," said Lau. "A lot of oil companies have scaled back and contracts are being renegotiated or terminated," he added.
So far, Asia has not seen a raft of distressed asset sales and some auction processes have been put on hold. For example, AIM-listed oil producer Afren was looking to sell assets at one point. Although Afren attracted Chinese bidders, an agreement with proved elusive.
Oil and gas exploration company Newfield Exploration also considered selling assets in China and had appointed Goldman Sachs to that end. Ultimately, Newfield decided to hold onto the assets.
“On the distressed side of things, some companies have successfully raised financing through bonds and have not gotten to the stage where they are desperate to sell," said Lau.