The world's largest oil companies and private equity groups, including ExxonMobil, BP, Total, Chevron, Statoil, and Blackstone could be preparing for an acquisition spree after the collapse of the crude oil price has hammered down the value of smaller target companies.
$31 billion of debt was raised in the first two months of 2015. This surpassed the previous quarterly record of $28 billion set in 2009 when the oil price last collapsed.
Source: Investing.com
Richard Owen, the chairman of ExxonMobil's Australian division, said Australia was an interesting place for acquisitions at the moment. The company recently told U.S. investors it was "very alert to value propositions" as reported in The Australian Financial Review (AFR).
The companies are taking advantage of very low borrowing costs to prop up balance sheets which could also help fund future acquisitions.
Private equity groups see the collapse in company valuations as a great time to hunt for assets. The AFR reported PE groups Carlyle and Blackstone have been raising additional funds from investors and now have $U.S.19 billion available for investment in energy.
What does this mean for the Australian oil and gas industry?
Even our largest and most profitable companies Woodside Petroleum Limited (ASX: WPL) and Santos Ltd (ASX: STO) are feeling the squeeze on finances from the low oil price. Of these two, Woodside has the balance sheet flexibility to undertake significant acquisitions and have recently purchased some of Apache's oil and gas assets for $U.S.3.75 billion.
Many of the junior companies rely on debt and equity capital to fund exploration and expansion plans. Investors and creditors will be less likely to support these companies when the required returns may not be achieved. With the share price of most oil companies languishing near multi-year lows, it is a very tough time for the sector.
Who could be likely targets?
Beach Energy Ltd (ASX: BPT), Drillsearch Energy Limited (ASX: DLS) and Senex Energy Ltd (ASX: SXY) operate predominantly in the Cooper Basin. All three companies hold licences over high-value ground with conventional and unconventional resources which could be of interest to the larger players.
Horizon Oil Ltd (ASX: HZN) – after the proposed merger of equals with ROC Oil Company Limited in 2014 was scuttled by a cash offer from China's Fosun Group, Horizon could be a potential takeover target. Horizon's major shareholder Austral-Asia Energy has increased their holding from 24% to 28% over the past two months.
Should you buy?
Acquisitions can provide shareholders of the target company a quick return via any premium paid by the acquiring company. Investors generally should not make substantial purchases in anticipation of an acquisition offer as they are never a sure thing.
The exception is when the company you are buying is likely to provide good returns in the future, regardless of whether a takeover occurs or not. With the oil and gas sector currently beaten down, investors who undertake thorough research may well find some junior companies with bright futures.
