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Soaring Energy Prices Will Fuel Oil & Gas M&A

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Nightdaytrader   Tuesday, 02/07/06 12:16:29 AM
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Soaring Energy Prices Will Fuel Oil & Gas M&A

Monday February 6, 2006, 6:02 pm

INTERVIEW: Soaring Energy Prices Will Fuel Oil & Gas M&A


HONG KONG (Dow Jones)--Oil and gas merger and acquisition activity in Asia should rise sharply this year as Asian energy companies continue to compete aggressively for additional reserves, says the head of energy investment banking at JP Morgan & Chase (JPM) in Hong Kong.

"With US$60 to US$70 oil prices, M&A transaction values will continue to be large and given the substantial cash reserves and strong share performance of Asian companies, they will not be deterred from competing against their U.S. and European counterparts for international assets," said Ivor Orchard, head of energy investment banking at JP Morgan in Hong Kong.

He said while the global volume for oil and gas M&A set a new record in 2005, so did the prices paid for assets. The average price for oil and gas assets increased to around US$10 per barrel, more than double the price paid per barrel of proved reserves in 2004.

"But that masks the fact that the average price was over US$15 in the U.S. and over US$20 in Canada".

He said that buyers are willing to pay higher prices because of the need to replace reserves and meet production growth targets, as well as the ability to use a very liquid oil futures market to hedge against falling prices.

In 2005, oil and gas M&A deals totaled US$14 billion, compared with US$5.3 billion in 2004, according to Dealogic PLC (DL.LN) a capital markets data provider. Orchard said he expects the level of activity both in Asia and globally to keep rising.

China's and India's hunger for energy resources to fuel their fast-growing economies is an obvious driver behind this, but it is too simplistic to see the increasing level of activity just in these terms, said Orchard.

"In both countries, individual companies have grown to the point where they are now looking to compete on the world stage. By virtue of strong financial performance, and share market support, they have the capital to do so," said Orchard.

"Just look at the capitalization of companies such as PetroChina Co. (PTR), which is around US$170 billion - larger than Chevron Corp. (CVX). These companies have the capability to successfully undertake multibillion dollar transactions."

Orchard, who is a former executive at Royal Dutch Shell PLC (RDSB) and has recently advised Chinese oil giants such as CNOOC Ltd. (CEO), China National Petroleum Corp. (CNPC.YY) and China Petroleum & Chemical Corp. (SNP), or Sinopec, said that until the last twelve months Asian companies had relatively little success in acquiring overseas energy assets.

The most glaring example of this was Chinese offshore oil producer CNOOC's failed US$18.5 billion takeover of U.S. oil company Unocal Corp. The acquisition attempt crumbled under U.S. Congressional opposition.

Orchard, who advised CNOOC on the Unocal deal, said that, although CNOOC was ultimately unsuccessful in acquiring Unocal, the example which it set in competing directly against Chevron has fundamentally changed the landscape for future Asian oil and gas M&A. Now, he said, these companies have become increasingly sophisticated in their analysis of potential targets, as well as simply more aggressive.

"Companies in the region will no longer be deterred from doing large corporate transactions, even if the United States may not be their first port of call. CNPC's acquisition of PetroKazakhstan is a case in point," said Orchard.

CNPC paid US$4.18 billion for Petrokazakhstan, a Canadian oil company with operations in Kazakhstan.

In 2005, China-related completed oil and gas M&A topped US$5.5 billion. And this year looks likely to surpass that. Earlier this month, CNOOC disclosed a $2.27 billion acquisition of a stake in a Nigerian oil field and is considering a US$2 billion bid for Canada-based energy company Nations Energy, which owns an oil field in Kazakhstan. This is a sharp rose over the last two years, when CNOOC spent just US$825.5 million on completed acquisitions, according to Dealogic.

Orchard added that this year, big spenders such as CNOOC and CNPC will be looking at Russia for assets.

"Russia will continue to be an important focus for Asian as well as U.S. and European companies this year. The sale of assets out of the TNK-BP Holding (TNBP.RS) portfolio is already attracting interest out of Asia," said Orchard.

TNK-BP is the holding company that incorporates BP PLC's (BP) operations in Russia.

"CNPC has been the most active player to date in looking for opportunities in Russia, and is likely to be joined by companies such as ONGC of India."

Competing Giants

Orchard also explained that while China is busy looking for energy reserves, India isn't far behind and often competing with the Chinese during the bidding process.

"In 2005, the Chinese and Indians were frequently in competition with each other, for assets in Nigeria, Kazakhstan and Ecuador. However, the recent successful joint bid by ONGC and CNPC for Petro-Canada's (PCZ) assets in Syria may be a sign that cooperation will be an increasing feature of future transactions," said Orchard.

In December, a joint venture between India's Oil & Natural Gas Corp. (500312.BY) and China's state-run CNPC successfully bid for a stake held by Petro-Canada in an oil field in Syria.

Getting Deals Done

While cash rich countries and companies in Asia are busy scouring the globe for energy reserves, investment banks in the region are busy trying to put these M&A deals together, which can pay lucrative fees.

Orchard said that, aside from M&A advisory services, large oil and gas acquisitions also tap other investment banking products such as commodity hedging and debt and equity financing.

But Orchard said that deals involving energy assets, while potentially more lucrative, reach far beyond simple M&A when it comes to the negotiating table.

In 2001, Orchard advised Shell on its attempted takeover of Woodside Petroleum Ltd. (WPL.AU), one of the largest listed oil and gas companies in Australia and operator of the North West Shelf LNG project. The Australian government blocked the transaction, viewing it to be against national interests because of Shell's ownership of competing LNG projects in the region, said Orchard.

Like the CNOOC failure, the Woodside deal also highlighted the political complexities surrounding oil and gas M&A. "Oil and gas is by nature geopolitically sensitive and it is inevitable that from time to time external events will affect the outcome of what would otherwise be straightforward M&A transactions."

-By Keri Geiger, Dow Jones Newswires; 852-2802-7002; keri.geiger@dowjones.com

-Edited by David Riordan

More Quotes and Company Information: WOODSIDE PETROLEUM LIMITED (ASX: WPL.ax)

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