Oil prices have declined sharply due to a largely negative economic outlook, both regionally and on a global basis. Many economists are now forecasting global growth of less than 1% for 2009, versus a consensus of around 5% a year ago. Some economies, such as China, may offer growth that is more attractive on a relative basis, but other key markets, including Japan and the United States are already in recession. As far as global energy stocks are concerned, what we have seen is a significant contraction of valuation multiples, almost across the board.
Is the contraction of multiples similar across each type of energy firm? What does this mean for Asian companies?
Practically all major oil and gas stocks currently look like good value on a long-term basis. And while the majors have lost around 30% of their market capitalisation over the past six months, they have fared better than many other types of energy firms. The depressed valuations imply a more attractive price of long-term growth, which is good news for potential acquirers. There are clearly significant market opportunities in this type of environment û especially when you consider that many companies in Asia are still relatively well-capitalised.
The effects of the credit crisis are well-documented in the banking and automotive sectors, but whatÆs the situation in the energy sector?
Unlike in the financial sector, we have yet to see a major energy player start bankruptcy proceedings. Sub-investment grade companies, however, have certainly seen a marked increase in their debt funding costs. These higher interest costs, combined with a lower growth forecast could present challenges for some firms. In some cases we may see more companies pulling back capital expenditure, while certain high-growth models may need to be modified to reflect the new economic reality.
We are fortunate in the way that many energy companies in this region remain relatively well-capitalised. At the same time, many of them have both sizeable operations and ample liquidity. In an environment like the one we are seeing now, it is not uncommon for firms with such characteristics to be rewarded by the market through a lower cost of debt. The list of relative winners may include certain Chinese state-owned enterprises (SOEs), which have not been affected by the credit crisis to the degree that you might expect û particularly with regard to the cost of capital.
Given current valuations and the potentially favourable funding costs, what is the outlook for acquisitions by SOEs?
SOEs in China û and elsewhere for that matter û are indeed interested in current valuations. But while many of them may be actively reviewing acquisition ideas, it should be noted that something of a æstand-offÆ has developed: Sellers may be unwilling to transact at valuations which seem attractive on an absolute and relative basis, while some SOEs are reluctant to seek approvals for deals with significant headline premiums. Having said that, some companies are finding themselves in positions where they have little choice but to sell, and the æstand-offÆ looks increasingly likely to be resolved in the New Year.
Do you foresee industry consolidation? What other opportunities exist?
In our view, current valuations certainly suggest the possibility of consolidation-type transactions within the industry. This may be especially true now that political resistance surrounding more sensitive M&A transactions has declined somewhat. We think that consolidation transactions could come from regional as well as global majors and would likely be stock-weighted, given the current lack of access to funds. We also think that the prevailing environment could create opportunities for independent E&P (exploration and production) firms to divest non-core assets, or to seek partners either through JVs or the introduction of strategic minority stakes.
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