Low oil prices and a sharp fall in share market values have made some Australian oil and gas companies attractive acquisition targets.
Roger Dartnell, EY’s Oceania Oil and Gas Transactions leader, said larger, well-capitalised oil and gas companies may seek to take advantage of lower valuations to acquire companies with exploration or production assets.
“We think given the current market conditions, exploring the ASX for acquisitions is potentially a cheaper and also a more certain way to grow reserves and should be considered by management teams,” he said.
Woodside Petroleum announced it was buying out Texas-based Apache Corporation’s interests in the Australian Wheatstone natural gas project, plus the Balnaves oil and the Kitimat gas projects in Canada for a total of US$2.75 billion (AU$3.348 billion).
Woodside saw the investment as a counter-cyclical, value-adding growth opportunity picked up at a good valuation.
Oil prices have plunged to well below $US70 a barrel, the lowest in more than five years.
Dartnell said the rate of decline in the oil price had surprised many.
“Sustained low oil prices pose a significant threat to companies’ business and financial models, with existing investment plans in doubt and debt covenants at risk for some,” he said.
EY’s recently released annual global oil and gas reserves study showed upstream spending globally more than doubled over the five-year period from $US315 billion in 2009 to $US678.9 billion in 2013.
Dartnell said investment would come under the microscope and projects were likely to be in jeopardy as companies reacted to lower oil prices and assessed the impact on long-term project economics.
Exploration was the most discretionary part of the budget and so will be under most pressure. This will have flow-on effects to the oil industry services sector.
Those reliant on oil prices to sustain and grow may reflect on the iron ore price shock of two years ago when alternative financing options such as infrastructure sale and leaseback, and non-core asset sales were considered.
“This takes more time however, so companies need to be prepared,” Dartnell said.
“Additionally companies are refocusing from increasing production to productivity improvements and they are doing this quickly.”
Exploration and development costs have increased in recent years, reaching a record level of around $US22 per barrel of oil equivalent in 2013.
“As a result, an acquisitions-based growth strategy through shopping on the ASX and other exchanges could be more consistent with improving near-term returns on capital for some companies, compared to longer time frames for an exploration-led approach to growth,” Dartnell said.
“Historically a commodity price shock can be a pre-curser to M&A activity. This is a time to be prepared to buy, refinance or defend.”