Addax - Keeping Upstream Merger Talk In Check
HEARD ON THE STREET: Keeping Upstream Merger Talk In Check
Last Update: 6/18/2009 9:15:42 AM
By Matthew Curtin
A DOW JONES COLUMN
Oil prices are rising. Risk appetite is returning. So should we prepare for a
surge of takeover activity in the exploration and production sector?
Even if western oil majors are currently absorbed with their own problems,
emerging market and state-owned oil companies are eager to secure new resources.
Rumors that China's Sinopec Group or Korean National Oil Co. are lining up a $7
billion bid for Toronto- and London-listed Addax Petroleum, the operator of the
Taq Taq oil field in Iraqi Kurdistan, have helped ignite the sector.
Still bankers and investors should keep their excitement in check. First, the
capital-markets thaw has eased pressure on the balance sheets of the many
independent upstream companies geared up in the boom. A wave of distressed
selling no longer looks so likely. The UK E&P sector, for example, has already
raised roughly $4 billion in new debt and equity this year.
Second, there's a mismatch between what buyers and sellers of upstream assets
think they're worth. Few buyers are convinced the recent oil price rally is
sustainable. Yet some owners of E&P assets still hope prices will return to last
year's giddy levels. In April, French oil group Total pulled a C$1.75 a share
offer Canadian oil sands developer UTS Energy Corp. after failing to win over two
thirds of shareholders. But today the stock is trading at C$1.58, below Total's
last offer.
Meanwhile, value is as notoriously hard to determine in the upstream sector as
ever. A rising tide lifts all boats, but higher oil prices have to be put in the
context of the quality of the individual E&P assets the companies own - proved
reserves, producing wells, projects in development, and exploration - and where
they are. A barrel of oil underground isn't worth the same in Nigeria, Iraq or
Kazakhstan because of different tax rates and political risk, among other
factors.
Of course, the national oil companies have deep pockets and their expansion plans
may be less commercially driven. But that does not mean they will pay well over
the odds. More likely, the current stand-off between buyers and sellers will
continue until either sellers lose their nerve or further evidence emerges that
oil prices are indeed heading skywards again.
(Matthew Curtin has been a financial journalist since 1990, and has written on
international finance and business - from South Africa, Singapore and France -
since 1994. He can be reached at +331 4017 1746 or by email:
matthew.curtin@dowjones.com)
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(END) Dow Jones Newswires
June 18, 2009 09:15 ET (13:15 GMT)
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