Easwaran Kanason

Co - founder of NrgEdge
Last Updated: September 1, 2020
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Business Trends

It’s been a dry year so far for industry mergers and acquisitions – or A&D (acquisitions and divestitures) as the activity is known in the upstream world. But what little activity there is makes for some interesting reading. Particularly because it provides some idea for what the future could look like post-2020. Occidental Petroleum, for example, looks shaky as it furiously attempts to shed its debt load. Chevron, on the other hand, has had the last laugh, acquiring Noble Energy and finally managing to stitch together its disparate Permian assets into a more comprehensive tapestry. The latest of these intriguing moves also centres upon US shale, specifically the Permian golden goose. Malaysia’s national oil company Petronas is reportedly looking into buying its way into US shale, with driller DoublePoint Energy the target.

While neither firm has commented and reports suggest that talks are still at a preliminary stage, the possibilities are interesting. DoublePoint Energy has a 100,000 acre tranche of drilling rights smack in the prolific heart of the Permian, currently producing some 55,000 b/d of shale oil. Backed by private equity including the Blackstone Group, Apollo Global Management, Quantum Energy Partners and Magnetar Capital, DoublePoint is headed up by Cody Campbell and John Sellers – who made a name for themselves for patching together separate Permian drilling leases into a more cohesive whole, then selling that on to interested buyers for a tidy profit. Their previous largest sale (to Parsley Energy in 2017) amounted to US$2.8 billion.

Given the current climate, Campbell and Sellers might not be able to hit those same highs. After all, the industry is reticent to splash out wantonly in the Permian, given the history of steep production drops and the tricky oil price situation going forward. Chevron’s acquisition of Noble Energy, for example, was a relative steal at US$5 billion. DoublePoint Energy’s assets have already been previously assessed – a push by its private equity owners – with a 2019 valuation pegged at US$5 billion. It might fetch half of that today, making it a relatively safe bet for Petronas and still a decent sum for DoublePoint.

But what is more interesting is not this sale itself, but how it fits into the wider strategy of Petronas. Known as one of the most well-run of the national oil companies that emerged since the 1970s, Petronas leveraged its massive (at the time) asset base in Malaysia to go international. It moved into Central Asia, the Middle East and Africa early, opening out new upstream horizons there. It bet big on natural gas – specifically LNG – and remains one of the largest producers in the world and operates one of the largest LNG fleets through subsidiary MISC. It has recently expanded its downstream portfolio with the massive RAPID refinery in Johor, significantly expanding its footprint in high-value fuels and petrochemicals. And now, it seems, it has its sights set on a new frontier: the Americas.

Petronas and the Americas are no stranger to each other, but arguably the relationship kicked off in earnest when Petronas began exploring options to establish an LNG export facility in Canada’s British Columbia coast. That attempt hit several snags, its own Pacific Northwest project was derailed due to environmental sensitivity, with Petronas eventually buying a 25% stake in the Kitimat project led by Shell. But over the past two years, the pace has picked up. Petronas snapped up 10 blocks in Mexico, including some in the offshore Salinas Basin and Mexican Ridges. It bought a 50% stake in the Tartaruga Verde and Espadarte fields in Brazil’s offshore Campos Basin. It has an ongoing, and very promising drilling campaign in Suriname. It is aiming to have its first shale oil success through Argentina’s Vaca Muerta formation, through a US$2.3 billion joint venture with Argentine state oil firm YPF. And it is already in the USA, jointly announcing an ultra-deepwater discovery in the US Gulf of Mexico’s Monument well in January 2020 with its partners Equinor and Repsol.

Given this context, a Petronas presence in the Permian is not a possibility but an eventuality. If not DoublePoint Energy, then someone else. But the time seems ripe for the hunt, as the red hot-valuations of Permian players cool down to something more realistic and less risky since 2018. For the path that Petronas’ Americas expansion has taken – a stated focus for the company – this is a logical progression. And by the sounds of it, there might be more to come.

Market Outlook:

  • Crude price trading range: Brent – US$44-46/b, WTI – US$41-43/b
  • Crude oil prices firm up, as Hurricane Laura rips its way through the US Gulf, impacting offshore production and inland refineries across a key node in US energy
  • A further drop in the US crude stockpiles suggested that demand was quietly recovering, with the market also buoyed by signs that China had begun some intense crude buying in line with its trade commitments with the US signed back in January
  • In a landmark move, ExxonMobil was removed from the Dow Jones Industrial Average after 92 years, though Chevron (and now Honeywell) remains part of the 30-company strong stock market index that purports to measure America’s largest companies

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