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Global Upstream M&A Update

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Snapshot of 2020

2020 was a challenging year for deals in the international oil & gas sector, a year of reduced energy demand linked to the Covid pandemic, with price volatility and, for a time, a sustained reduction in oil prices, all creating distance on deal pricing between would-be sellers and buyers resulting in sale processes being shelved, and deals being restructured or terminated. However other factors played a role in addition to the pandemic. In March the OPEC+ agreement on production, which had been a generally stabilizing impact on global supplies and pricing, broke down for a short period, which, combined with the already deteriorating global economic situation, had an immediate negative impact on the market and affected the prevalence of deals. In addition, the focus of upstream companies on carbon reduction and energy transition increased in 2020 as a result of the economic downturn, also playing a part in reducing M&A activity.

PWC reported that global M&A activity (all sectors) reduced by 88% in value and 40% in number in 2020 compared to 2019, and it seems that there was an approximate 50% decline in global energy deals in 2020, though with significant regional variation. We look at some of the activity in Asia, the Middle East and Africa in 2020 before looking ahead to 2021.

Asia

In Asia, which had seen higher than average deal volumes in 2019, a group of transactions associated with China Oil & Gas Pipeline Network Corporation, and the consolidation of a number of pipeline systems into a national pipeline network, including PetroChina’s sale of pipeline assets for in excess of US$49 billion pushed up aggregate deal volumes when compared to other parts of the world. A headline deal in India was Gail’s acquisition for US$500million of a stake in Konkan LNG’s domestic liquefaction and regasification business. However M&A activity for Asian upstream assets in 2020 was significantly depressed and instead the focus, particularly of Asian NOCs, was on international opportunities arising from the global downturn. Prospects in Asia Pacific for 2021 are more optimistic with IOCs including Shell, Repsol and Eni pursuing upstream assets sales in the region as well as companies such as Mubadala, continuing a trend for exits from non-core Asian assets and a long term focus on energy transition for these types of companies.

Africa

The effect of the global economic downturn on many African oil & gas producers and their host countries has been a steep reduction in sales / export revenue and a knock on impact on the State budgets and reserves. Whilst investments in exploration and production have continued, albeit in line with the suppressed levels globally, there have been only limited highlights in discoveries in 2020, such as Total’s Luiperd discovery, following its Brulpadda discovery, in South Africa, and the focus has been on sustaining investment and project timelines in existing core energy infrastructure projects, including those for LNG in Mozambique. M&A deals have been correspondingly scarce through 2020, and at lower values, evidencing the challenges faced with financing acquisitions in higher risk and non-core areas. Total’s acquisition of Tullow Oil’s upstream interests in Uganda together with its interest in the East African Crude Oil Pipeline for US$575million, and Perenco’s acquisition of Total’s interests in a number of offshore fields in Gabon (and the Cap Lopez Terminal) for US$ 350million, were highlights and exceptions to this general trend.

Middle East

Energy sector M&A in the Middle East in 2020 largely aligned with global trends, with a slow start to the year and with economic uncertainty suppressing demand. The UAE was a particular exception, with some landmark ADNOC deals, including the sale of a 49% interest in ADNOC’s pipeline assets to an investment consortium for U$10 billion, the largest energy infrastructure investment in the region, and at the time the largest in the world in 2020. Transactions in the UAE, including the takeover of Abu Dhabi’s TAQA by Abu Dhabi Power Corporation were against a backdrop of some significant gas discoveries in both Abu Dhabi / Dubai and Sharjah. Improved relations between Israel and some of Arab States, including the UAE and Bahrain following the US brokered “Abrahams Accords”, and the renewal of diplomatic relations between Qatar and Saudi Arabia, the UAE, Egypt and others in early 2021, following the Qatar embargo, suggests that prospects for increased intra-regional trade and investment, including within the energy sector, are more positive for 2021.

2021 Lookahead

The attitude to investment in the oil & gas sector remains shaped by the economic trends that developed through the pandemic in 2020 and which are continuing, albeit against a backdrop of Covid vaccine roll-out and economic stimulus programmes in Europe and the US, and it is therefore likely that restructurings and insolvencies within sector will continue. Many industry commentators forecast a continuation of consolidation of companies and assets, and further divestment of non-core assets by Majors, particularly in Asia, Africa and Europe, as they focus on specific basins, including East and West Africa, Brazil/ Suriname/Guyana and the Gulf of Mexico and the renewed potential for upstream and midstream investments and partnership in the Middle East. An emphasis on lower risk investment, and on production over exploration, aimed at preservation and generation of cash may be a trend in 2021: although, as Rystad Energy has commented, E&P companies will continue to invest in high risk exploration, but through streamlined portfolios, drilling fewer wells and following more detailed selection procedures. Challenges in financing transactions will remain not just because of the continued economic uncertainty, but increasingly due to the emphasis in financing of energy transition, to carbon reduction, energy transition and the focus on ESG.  Such limits on the availability of capital for acquisitions is likely to favor Asian and Middle Eastern National Oil Companies, Majors and private equity backed businesses

Investment in the oil & gas sector is expected to recover marginally through 2021 with a greater uptick in 2022/23, although industry commentators draw parallels to the position now to that of the last market adjustment, in 2014, after which investment never recovered to pre-2014 crisis levels. How such projected levels of investment in 2021 will affect M&A in the upstream industry globally is unclear, although the number of recent announcements of long term strategic upstream divestment programs, such as those of Repsol and BP of their non-core assets, may indicate that levels of activity are set to improve.

 

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