You’ve probably heard the saying “buy low and sell high” or some version of it. Oil prices have been painfully low, so does that mean it’s time to buy physical oil assets?
The shale boom in North America over the past 10 years has brought many potential buyers through our office looking forConsulting support. The allure of high returns, large drilling inventories and capital flexibility can be tempting. Many buyers who struggled to stomach the valuations of the assets when oil prices were high are now revisiting the space thinking there may now be a number of great deals to be had. That’s where we start exerting a bit of caution with our clients as there is no magic formula or time – given a bit of hindsight, the landscape is littered with “bad deals”.
Most people thought last year was going to be the year of opportunity in the deal market, but operators proved resilient and lenders demonstrated patience and flexibility. Fast forward and more than a year of low prices is putting some operators in sticky situations. The best deals (for the best assets) make sense at almost any oil price, but there’s no doubt it’s better to buy when the sellers have to sell.
We believe a buyer’s market will emerge if low oil prices persist (there are likely great deals happening now and we’ll see them announced over the next few months). But generally speaking, the sellers who are forced to divest assets do not have much exposure to the best acreage, and those who do will part with their best assets only as a last resort. Outside of relatively small “bolt-on” asset deals, we expect corporate M&A to be the preferred entry vehicle for companies entering core areas.
Companies come to us after they’ve started the process and we generally help them get better organized and more focused in their search. Most haven’t considered all the consequences. They want an asset that meets all or most of the following criteria:
In short, they’re looking for a unicorn – that is, an asset someone else has discovered or purchased before really knowing what they had. For the most part, companies don’t sell these assets. They’re the crown jewels.
And although you can’t buy another company’s crown jewels on the cheap, investing in upstream properties can still be a good option.
These days – with the amount of liquidity looking for deals and a wealth of publicly available data to analyse performance – it would be hard to buy something that is materially undervalued by the rest of the market. Well, unless you’re willing to take exploration risk.
Executing the transaction isn’t the first step. We start by asking a few basic questions:
Even if a company can get internal agreement on these issues above, the most important element is its capability. Does it have internal strengths and infrastructure that will help it execute or does it need to acquire the talent through a corporate acquisition?
That’s just the beginning of the process. The answer to our original question isn’t as simple as most people hope but, in our view, it is much more important to identify the right deal as opposed to a good deal. Check the weather before you fly, the timing might be right or you might be flying into a storm.
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According to the Nigeria National Petroleum Corporation (NNPC), Nigeria has the world’s 9th largest natural gas reserves (192 TCF of gas reserves). As at 2018, Nigeria exported over 1tcf of gas as Liquefied Natural Gas (LNG) to several countries. However domestically, we produce less than 4,000MW of power for over 180million people.
Think about this – imagine every Nigerian holding a 20W light bulb, that’s how much power we generate in Nigeria. In comparison, South Africa generates 42,000MW of power for a population of 57 million. We have the capacity to produce over 2 million Metric Tonnes of fertilizer (primarily urea) per year but we still import fertilizer. The Federal Government’s initiative to rejuvenate the agriculture sector is definitely the right thing to do for our economy, but fertilizer must be readily available to support the industry. Why do we import fertilizer when we have so much gas?
I could go on and on with these statistics, but you can see where I’m going with this so I won’t belabor the point. I will leave you with this mental image: imagine a man that lives with his family on the banks of a river that has fresh, clean water. Rather than collect and use this water directly from the river, he treks over 20km each day to buy bottled water from a company that collects the same water, bottles it and sells to him at a profit. This is the tragedy on Nigeria and it should make us all very sad.
Several indigenous companies like Nestoil were born and grown by the opportunities created by the local and international oil majors – NNPC and its subsidiaries – NGC, NAPIMS, Shell, Mobil, Agip, NDPHC. Nestoil’s main focus is the Engineering Procurement Construction and Commissioning of oil and gas pipelines and flowstations, essentially, infrastructure that supports upstream companies to produce and transport oil and natural gas, as well as and downstream companies to store and move their product. In our 28 years of doing business, we have built over 300km of pipelines of various sizes through the harshest terrain, ranging from dry land to seasonal swamp, to pure swamps, as well as some of the toughest and most volatile and hostile communities in Nigeria. I would be remiss if I do not use this opportunity to say a big thank you to those companies that gave us the opportunity to serve you. The over 2,000 direct staff and over 50,000 indirect staff we employ thank you. We are very grateful for the past opportunities given to us, and look forward to future opportunities that we can get.
Headline crude prices for the week beginning 15 July 2019 – Brent: US$66/b; WTI: US$59/b
Headlines of the week
Unplanned crude oil production outages for the Organization of the Petroleum Exporting Countries (OPEC) averaged 2.5 million barrels per day (b/d) in the first half of 2019, the highest six-month average since the end of 2015. EIA estimates that in June, Iran alone accounted for more than 60% (1.7 million b/d) of all OPEC unplanned outages.
EIA differentiates among declines in production resulting from unplanned production outages, permanent losses of production capacity, and voluntary production cutbacks for OPEC members. Only the first of those categories is included in the historical unplanned production outage estimates that EIA publishes in its monthly Short-Term Energy Outlook (STEO).
Unplanned production outages include, but are not limited to, sanctions, armed conflicts, political disputes, labor actions, natural disasters, and unplanned maintenance. Unplanned outages can be short-lived or last for a number of years, but as long as the production capacity is not lost, EIA tracks these disruptions as outages rather than lost capacity.
Loss of production capacity includes natural capacity declines and declines resulting from irreparable damage that are unlikely to return within one year. This lost capacity cannot contribute to global supply without significant investment and lead time.
Voluntary cutbacks are associated with OPEC production agreements and only apply to OPEC members. Voluntary cutbacks count toward the country’s spare capacity but are not counted as unplanned production outages.
EIA defines spare crude oil production capacity—which only applies to OPEC members adhering to OPEC production agreements—as potential oil production that could be brought online within 30 days and sustained for at least 90 days, consistent with sound business practices. EIA does not include unplanned crude oil production outages in its assessment of spare production capacity.
As an example, EIA considers Iranian production declines that result from U.S. sanctions to be unplanned production outages, making Iran a significant contributor to the total OPEC unplanned crude oil production outages. During the fourth quarter of 2015, before the Joint Comprehensive Plan of Action became effective in January 2016, EIA estimated that an average 800,000 b/d of Iranian production was disrupted. In the first quarter of 2019, the first full quarter since U.S. sanctions on Iran were re-imposed in November 2018, Iranian disruptions averaged 1.2 million b/d.
Another long-term contributor to EIA’s estimate of OPEC unplanned crude oil production outages is the Partitioned Neutral Zone (PNZ) between Kuwait and Saudi Arabia. Production halted there in 2014 because of a political dispute between the two countries. EIA attributes half of the PNZ’s estimated 500,000 b/d production capacity to each country.
In the July 2019 STEO, EIA only considered about 100,000 b/d of Venezuela’s 130,000 b/d production decline from January to February as an unplanned crude oil production outage. After a series of ongoing nationwide power outages in Venezuela that began on March 7 and cut electricity to the country's oil-producing areas, EIA estimates that PdVSA, Venezuela’s national oil company, could not restart the disrupted production because of deteriorating infrastructure, and the previously disrupted 100,000 b/d became lost capacity.