AOP talked to Claude Illy, Principal, Head of Oil & Gas Corporate Finance Advisory for Sub Saharan Africa of Deloitte, about the trends in mergers and acquisitions following the oil price crash and the impact on independents and majors.
How has the downturn in the oil and gas prices impacted financing for independent oil and gas companies in Africa?
It certainly has had a big impact on the oil and gas industry, particularly on independent and indigenous upstream and oilfield services companies. Some of the big companies like Tullow Oil managed to roll over their debt, but it has not been easy. The oil price drop has really tested the resilience of these companies, and has unfortunately pushed many into financial distress. However, following the production cuts agreed in December 2016 by OPEC, Russia and other countries and the resulting sustained increase in crude oil prices, the outlook has improved for the industry.
If oil prices remain at current levels, i.e. around $50 per barrel and with the service providers having dropped their prices materially, the break-even price for several producing and to-be-developed oilfields has dropped to below crude oil prices. That is helping companies to turn from cash burning to free cash flow positive positions. However, we are still in a tough bank lending environment for companies to borrow on the back of an approved development plan or existing production. Thus, new field developments for independents and indigenous companies will likely be limited and take time to reach FID.
Did this trend give the majors a greater stronghold in Africa?
In terms of the majors coming in, I think they have been and will continue to be very selective. World-class discoveries in need of capital and/or technical expertise to be developed will attract the majors. However, marginal or smaller fields will not, because the majors themselves are also streamlining their upstream portfolios. We recently saw this with BP buying into Kosmos’ offshore blocks in Senegal and Mauritania and farming into ENI’s giant Zohr field offshore Egypt; with Exxon buying into ENI’s giant Area 4 discoveries offshore Mozambique; or with CNOOC and Total acquiring an interest in Tullow’s large onshore oil discoveries in Uganda.
This is therefore a good time for the majors to select and acquire “prime assets” at a cheaper price across the African continent in order to beef-up or diversify their exploration or early-stage development portfolios — capitalizing on truly world-class discoveries.
What strategies should companies employ to be competitive for the limited financing available in Africa in the next year or two?
Preparation and “packaging” is vital. For example, there are many Nigerian companies that are seeking to raise funding, but they are not well-prepared. Banks are being very selective. They require sound business plans for resilient projects with good economics from companies with a proven track record. The banks are therefore cherry-picking the best opportunities, and don’t want to take too much risk.
Companies that want to raise money therefore need the right management team, the right track record, the right project and the right preparation. Furthermore, the limited available debt or equity funding is mainly dedicated to development and production. There is hardly any funding available for exploration. Equity is also scarce. Private equity firms are investing in some exploration plays, but they are being very selective. In general, exploration will be difficult to externally finance. We have seen some recent successful exploration or development farm-outs, but here-again, the farmees are being very selective.
What has been the trend for mergers and acquisitions in the oil and gas industry for 2017 in Africa? What is driving that trend?
There are a few trends. You have independents that don’t have the capacity to raise equity or borrow and have had to sell or farm-out assets. In particular, there are numerous exploration companies that do not have enough cash to finance the committed work programs under their licenses and are forced to farm-out or relinquish their exploration blocks. There are also some attractive new plays, such as the Mauritania-Senegal-Guinea-Bissau Basin, which could become be a world-class area for oil and gas, and that has attracted a lot of interest. The other side of this drive for M&A activity has mainly been the majors cherry-picking attractive assets. M&A activity has therefore been mainly driven by the fundraising needs of cash-strapped companies and the portfolio-building or diversification of the majors. However, we should expect some renewed interest from Private Equity firms.