Oil price weighs on M&A deals

Low, uncertain oil prices could pin back deal-making in Africa’s hydrocarbon sector this year after two strong years for mergers and acquisitions. For many Nigerian oil firms hoping to gain a foothold in their home market, the last two years appeared to represent the optimistic dawning of a new age. Encouraged by the retreat of […]


Low, uncertain oil prices could pin back deal-making in Africa’s hydrocarbon sector this year after two strong years for mergers and acquisitions.

For many Nigerian oil firms hoping to gain a foothold in their home market, the last two years appeared to represent the optimistic dawning of a new age.

Encouraged by the retreat of jaded major oil companies and confident that they had the skills and financial backing to step into the breach, local consortia triggered a wave of mergers and acquisitions activity that delighted indigenisation activists and bankers alike.

All that has ground to a halt in the wake of a global price slump that has seen crude oil halve in value – a shift that has all but destroyed prior assumptions about the viability of new and existing projects in Nigeria and beyond.

2015 has yet to herald a single African upstream deal, according to Chris Sheehan, director of M&A research at IHS, compared to over $7.4bn in Nigerian upstream deals in 2014. Last year played host to two of the top 10 largest local oil and gas deals of the last two decades, according to Dealogic data.

For M&A bankers used to stitching together the largest transactions, the year ahead is likely to be a testing one. Miguel Azevedo, Citigroup’s head of investment banking for Africa, believes that it is likely to be months, rather than weeks, before the market sees any resurgence in activity, and that the M&A slump will hit other sectors.

“Before you have a sense that oil has floored and it’s not in freefall anymore, you won’t really see deals happening, because investors don’t have the confidence to buy and banks and investors do not have the confidence to finance. So it’s nearly impossible to put together transactions,” he says.

Uncertainty over the oil price has meant that retreating oil majors are unlikely to continue their divestment programmes until they can get stronger valuations for their assets.

Last year, the largest Nigerian oil and gas deal was Shell’s $2.7bn asset sale to a local consortium of Aiteo, Taleveras Group and Tempo Energy, and divestment programmes are a major driver of overall transaction activity.

Dapo Okubadejo, KPMG’s head of M&A, PE and transaction advisory for Africa, says that the impact on divestment programmes is likely to be widely felt.

“We think that a lot of the IOCs will hold on to their planned divestment programmes to the extent there will be a reduction if not a complete stop on the divestment of assets right now because of the impact of crude oil prices on the valuation,” he says.

However, the impact of falling prices on indigenous firms may go beyond their inability to snap up bargains from departing majors. More ominously, there are signs that the oil slump could shatter the assumptions on which many of the smaller players entered the market.

London-listed Afren, the exploration and production firm, has sought new investment and been the target of takeover interest following a plunge in its share price.

Smaller producers were able to buy into the market by raising finance at a time of strong oil prices – but significant funds are required to proceed with exploration and development efforts.

Furthermore, financing which was arranged last year could have been contingent on prices staying above a certain level, and it is likely that lenders and producers alike will be reassessing the situation.

Michael Powell, co-head of oil and gas investment banking at Barclays, says that this squeezed position could lead to deal activity.

“The guys who are most vulnerable are those who start out with a relatively elevated debt situation and have limited flexibility to raise additional debt, and who have unavoidable capex commitments – that’s quite a toxic combination,” he says.

“Lenders won’t want to push their portfolio into a corner, however they are going to be reluctant to put new money out.”

KPMG’s Okubadejo says that firms will need to revisit their financing plans, and some may look to raise additional equity investment in the year ahead.

“A lot of the indigenous players and local companies that are holding oil fields will find it extremely difficult to finance their activities and so they will be more open to wanting to do transactions just to bring in additional equity finance,” he says.

One possibility, according to Camillo Atampugre, an investment banking vice president at Barclays, is for cash-rich indigenous companies to take advantage of the slump in the market and snap up distressed players – but he cautions there are only a handful of such players out there.

Citi’s Azevedo says that transactions driven by distress are in any case unlikely to make up for the overall shortfall of deals in the market.

As well as hitting M&A activity in established oil-producing nations, market watchers also believe that projects could suffer in countries which have recently ramped up extraction efforts.

International firms have shown a strong appetite in recent years to access offshore gas resources off the coast of East Africa – with Anadarko Petroleum and Eni among the firms ramping up multibillion-dollar investments in Mozambique.

However, Citi’s Azevedo believes that there is likely to be a slowdown in projects across the region.

“Whilst overall a slower oil price should be beneficial for countries in places, for example in East Africa, where they are net importers … I think there will be significant negative impact from delaying or postponing some of these investments,” he says.

Nevertheless, if an oil slump is good for anyone, it is good for consumers and the refiners who create usable products for them.

The downstream sector’s access to cheap oil, coupled with potential long-overdue deregulation in some African countries, could prove a fertile ground for future deals – especially as it is another market that oil majors have shown a willingness to leave behind.

Previously an unpopular sector among major oil company shareholders, M&A bankers will be hoping that the downstream can provide a rare glimmer of hope in the lean period ahead.

David Thomas

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