Global Insight Perspective | |
Significance | Reports from China today have suggested that CNPC Exploration, a joint venture between China National Petroleum Corp. and its listed subsidiary PetroChina, is considering making a US$5-billion bid for Papua New Guinea oil and gas producer Oil Search Ltd. |
Implications | Oil Search would offer CNPC Exploration a wealth of new upstream interests, including its promising natural gas assets in Papua New Guinea. The Australian firm's share price has skyrocketed amid today's speculation and is likely to continue to appreciate if this story gathers pace. |
Outlook | No official statements have been made in response to the reports and despite the underlying merits of the deal, much more will have to be revealed before one can begin to talk of a new wave of M&A activity by China's NOCs. |
Hey Big Spender?
The wait for another major international takeover play by a Chinese NOC could well be over. Reports coming out of Hong Kong today have linked CNPC Exploration, a joint venture involving China National Petroleum Corp. (CNPC) and its listed subsidiary PetroChina, with a move for Oil Search Ltd. According to the South China Morning Post, a bid of US$5 billion is under consideration and although no official statements have yet to be made by the players concerned, the suggested acquisition is an intriguing one.
Firstly, CNPC and PetroChina have stayed away from major M&A activity despite steadily increasing financial clout. Steady domestic crude output and new gas supply streams, as well as solid performance from international operations, in the context of the high market prices have handed the firms a war chest well suited for international upstream acquisitions of this sort (see "Related Articles"). Moreover, PetroChina's proposed Shanghai listing offers the promise of even greater financial freedom. Given the responsibility that Chinese firms bear for national energy security, a move to expand upstream access through some M&A activity is one that observers have been anticipating.
Secondly, Oil Search appears to be a suitable target for Chinese or other international players. The Papua New Guinea-based E&P firm has an increasingly diverse portfolio of upstream interests, with major reserves in Papua New Guinea and exploration licences in Yemen, Egypt and Libya. Last year's accounts showed profits totalling US$207.5 million and the company remains well positioned for further growth. The proven oil equivalent reserve base as at 31 December 2006 was 61.4 million barrels. Proven and probable reserves were 81.7 million barrels of oil equivalent (mmboe). The company’s Proven and Probable discovered gas resources were just under 4.6 trillion cubic feet, and including associated liquids, totalled 941.5 mmboe. The company's market capitalisation is roughly US$3.5 billion. As the leading acreage holder in PNG, the prospective development of LNG production there is of particular value and could be the central pillar upon which CNPC Exploration's suggested move rests.
Move Raises Questions
Still, one might question the need for the suggested move and the heavy premium it would force. On the one hand, domestic supply prospects for crude and gas alike promise to improve CNPC and PetroChina's overall rates of production in the years to come. With a number of promising upstream developments in the pipeline, new E&P work across China will also warrant ever-greater capital expenditure. Given this, an argument can be made that domestic consolidation should be CNPC/PetroChina's investment priority.
Similarly, Oil Search is very much a diamond in the rough. Its assets are some way from maturity and the firm will need to spend like never before to commercialise its reserve holdings. Specifically, if it is the PNG gas supplies that PetroChina is after, the company might be better served with a sales purchase agreement/equity investment combination for one of the LNG ventures which are under development there. That would limit the exposure to liquefaction cost pressures, amongst the other major expenditures, which the acquisition would bring while China is also in prime position to secure a share of the LNG output from either of the ventures Oil Search has a hand in. However, one cannot help but see Oil Search's crude holdings as the decisive consideration in any firm offers that may follow. That is where China's supply-side pressure is the greatest, but Oil Search would offer only limited relief.
Outlook and Implications
The characterisation of China's NOC as amongst the world's most aggressive international M&A players tends to be rather overstated and today's proposed move by CNPC Exploration for Oil Search will only fuel that particular fire. In truth, the recent wave of new sales agreements that Chinese operators have concluded points to a confidence in foreign operators and market forces contributing to national energy security.
There is no doubting the need to continue to expand international upstream access, given the country's existing import needs alone. However, China's NOCs have boosted their international supply options while stopping short of headline-grabbing M&A moves—or until now it would appear. Despite the good fit represented and the weight of expectation on international production growth, CNPC Exploration's proposed move does go against trend. PNG would mark a new front in China's pursuit of upstream access and considerably more information needs to be disclosed, by the players themselves, before one can talk with greater certainty of the implications of such an entry. Nevertheless, that qualification has not stood in the way of Oil Search shares appreciating at a rapid rate. Gains of over 10% today left the stock at A$4.27 and it is likely that further increases will come in the days that follow until the record is set straight.
Related Articles
- China: 24 August 2007: PetroChina Beats H1 Forecasts; Looks to Raise Overseas Upstream Output
- China: 20 June 2007:PetroChina Stocks Surge on News of Share Issue Plan; Now World's Second-Largest Oil Company
- Papua New Guinea: 25 April 2007:Oil Search Indicates Multiple Liquefaction Plants are Viable in Papua New Guinea
- Papua: 1 February 2007: Oil Search Pulls the Plug on PNG Gas Project