Oil Dealmakers Find Slim Pickings Among Premium-Priced Explorers
Crude needs to rebound to justify valuations, FirstEnergy says
Industry will have `almost no value' if oil doesn't recover

Wannabe dealmakers in the oil industry are stymied by a fundamental problem: there’s a mismatch between the price of crude and the value of companies.

Oil’s slump prompted speculation that explorers and producers, collectively known as E&Ps, were on the cusp of an acquisitions boom as many of the smaller companies burned through cash. That’s unlikely with crude languishing below $50 a barrel, according to research from FirstEnergy Capital LLP.

“Many names among the E&Ps require a much higher oil price than $60 a barrel to justify their valuation and you won’t have a transaction if you don’t pay a premium to the share price,” Stephane Foucaud, an analyst at FirstEnergy in London, said by phone. If crude doesn’t rebound, “there’s almost no value in the oil exploration and production sector.”



Royal Dutch Shell Plc’s $70 billion move for BG Group Plc helped lift the value of merger and acquisition proposals this year to about $150 billion, from roughly $110 billion in the same period last year, but deals involving smaller companies have been failing, according to data compiled by Bloomberg. Almost $30 billion of this year’s takeover approaches have been rejected, the data show.

Santos Rebuff

Santos Ltd. rejected an offer worth $11.3 billion including debt from Scepter Partners, calling it “opportunistic.” Canadian Oil Sands Ltd. snubbed a C$6.6 billion ($4.96 billion) bid from Suncor Energy Inc. saying it “substantially” undervalued the company.

“Reaching a consensus on fair value between buyer and seller presents challenges,” Martin Ewan, an oil and gas corporate partner at law firm Pinsent Masons LLP, said by e-mail. “Oil price volatility adds a layer of complexity to M&A deals not typical during more stable market conditions.”

A gauge of volatility in U.S. crude prices has almost doubled on average this year to the highest since 2009.

French oil giant Total SA said in October it wouldn’t bid for overvalued explorers and producers, which were trading as if crude were at $70 to $80 a barrel. Adding a takeover premium would bring their valuation closer to a $100 scenario, Chief Financial Officer Patrick de la Chevardiere said Oct. 29.

Out of 18 oil E&P companies tracked by FirstEnergy, only four can give positive returns for shareholders with oil at $60 a barrel, Foucaud said. Should prices rise to about $83, all but one would deliver returns.

Brent, currently trading at about $44-$45 a barrel, will probably recover to $58 in 2016 and may take a further two years to reach $70, according to the median estimate of 48 analysts surveyed by Bloomberg.

Feeding Frenzy

Most recently Anadarko Petroleum Corp., the third-largest U.S. natural gas producer, said it withdrew an all-stock offer for Apache Corp. after the company refused to engage in substantive talks. In a prolonged slump, targeted companies may find themselves less able to refuse prospective buyers.

Crude’s collapse has hit E&Ps hard, wiping off about 45 percent of their market value this year according to the index of 18 companies tracked by FirstEnergy. In comparison, the Stoxx Europe 600 Oil & Gas index, which includes the largest energy companies, has returned 3.5 percent.

The lack of completed deals “indicates that people aren’t yet at the completely distressed point, or on the buy-side they don’t believe that prices have bottomed out yet,” said Michael Wachtel, a partner at Clyde & Co., who has worked for more than 20 years in the oil and gas industry. The price slump has left many companies facing mounting debts and ratings cuts. A “feeding frenzy” may ensue in the first half of 2016 once buyers believe prices have reached their lowest point, Wachtel said.

There’s no shortage of funds for takeovers. The world’s six biggest publicly traded producers have more than a half-trillion dollars in stock and cash to snap up rival explorers, according to data from corporate filings compiled by Bloomberg. Ewan of Pinsent Masons said he’s noticing a “very healthy” interest in North Sea exploration and production assets.

“We are in a transition period where industry players have to adjust to a lower price environment and where buyers and sellers need to find a common ground for deals to happen,” said Lionel Therond, a London-based equity analyst with Standard Bank Group Ltd. “No doubt that price aspirations will go down as desperation sets in.”

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The average price of crude sold by OPEC fell below $40 a barrel for the first time 2009, underscoring the financial cost of the group’s strategy to defend its market share.

The daily OPEC Basket Price fell to $39.21 a barrel on Nov. 13, according to an e-mail on Monday from the organization’s secretariat in Vienna. The basket, an average of export grades from each of the group’s 12 members, typically trades below international oil futures as some OPEC nations pump denser or higher-sulfur crude that’s less profitable to refine.

Oil has slumped since the middle of last year as the Organization of Petroleum Countries keeps output elevated to pressure rivals it sees as responsible for creating a global surplus. A decline in production among its higher-cost competitors including U.S. shale drillers has now slowed, with output still above last year’s level. With OPEC members’ revenues diminished, the group may reconsider its approach if the price slump persists, according to the International Energy Agency.

Low oil prices aren’t just problematic for higher-cost producers, said Olivier Jakob, managing director at consultants Petromatrix GmbH in Zug, Switzerland. “It is also providing a challenging fiscal environment” for OPEC nations, he said.

OPEC’s annual revenues may be curbed to $550 billion at current prices from an average of more than $1 trillion in the last five years, Fatih Birol, executive director at the IEA, said in London on Nov. 10. Even Saudi Arabia, the group’s biggest member, faces a budget deficit this year that the International Monetary Fund predicts will exceed 20 percent of gross domestic product.

Still, IEA expects the price slump would need to persist for several years before the kingdom reconsiders its current strategy. OPEC Secretary-General Abdalla El-Badri, said this month that the global market is on track to rebalance next year.

OPEC ministers will meet to review their current policy on Dec. 4 in Vienna.

http://www.bloomberg.com/news/articles/2015-11-16/opec-export-price-falls-below-40-for-first-time-since-2009

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Russia, the world's top oil producer, sees the gap between global oil supply and demand narrowing gradually, the country's Energy Minister Alexander Novak told reporters on the sidelines of the G20 summit in Turkey.

He added that excessive oil supply could be eliminated in the second half of next year.

The Organization of Petroleum Exporting Countries (OPEC) was ready to hold consultations with Russia to assess the situation on the global oil market, Novak said, adding however that there was no joint position within OPEC regarding oil output cuts.


Read more at Reutershttp://www.reuters.com/article/2015/11/16/g20-turkey-russia-oil-idUSR4N13B00920151116#oikLAgLmdTwzeHS3.99

India plans to free prices of locally extracted natural gas and allow producers marketing autonomy as part of new rules for auctioning exploration blocks.

The government also proposes to introduce a revenue-sharing model with operators, replacing the current profit-sharing mechanism, according to a notice on the oil ministry’s website. The plan includes a uniform licensing policy that will allow operators to explore all forms of oil and gas resources, including coal-bed methane, shale gas and oil, tight gas and gas hydrates.

The government’s initiative follows petitions from gas producers that the current tariff is too low to support exploration and production costs. State control on fuel pricing has prompted oil majors such as Exxon Mobil Corp., Chevron Corp. and Royal Dutch Shell Plc to stay away from India’s exploration-block auctions, which started in 1999. BP Plc, Europe’s second-biggest oil company, is the only overseas company with any significant presence in India’s exploration sector.

Reliance Industries Ltd., which produces gas from a deepwater block in the Bay of Bengal, reversed morning losses in Mumbai, rising as much as 0.5 percent to 937.35 rupees. Cairn India Ltd. rose as much as 1.2 percent, overcoming a decline of up to 1.3 percent . Oil & Natural Gas Corp. gained as much as 0.9 percent, recovering from a 3.3 percent drop.

Prime Minister Narendra Modi has made energy security a priority for India, which imports the bulk of its oil and gas. The government announced open-market rates for gas extracted from 69 small fields slated for auction by next month, Oil Minister Dharmendra Pradhan said on Sept. 2.

“On the similar lines, it is proposed to provide pricing and marketing freedom for natural gas to be produced from the areas to be awarded under the new contractual and fiscal regime in order to incentivise production from these areas,” according to the statement.

India will also move to an open acreage licensing policy, allowing companies to submit bids for areas of their choice, according to the statement. The new rules, which have been sent to the explorers for their opinion by the end of this month, are aimed at “ease of doing business.”

http://www.bloomberg.com/news/articles/2015-11-16/india-plans-to-free-natural-gas-prices-under-new-auction-rules

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A union representing workers at state-run oil company Petroleo Brasileiro SA in Brazil's most important production area said on Monday it remains on strike over back pay and the state-owned oil company's plans for assets sales.

Sindipetro Norte Fluminense workers operate oil platforms and other services in the Campos Basin, the source of 64 percent of Brazil's oil production and 34 percent of its natural gas output.

SindipetroNF on Saturday rejected a call to end the two-week-old strike by FUP, the largest Brazilian oil workers union federation and one of the last strong power bases for embattled Brazilian president Dilma Rousseff.

An extended strike risks deepening Brazil's economic recession.

The walkout is also heaping further operational and financial pressure on Petrobras, which is struggling to maintain every source of cash as it tries to pay down about $130 billion of debt, the largest in the world oil industry.

"The rejection has created a confused situation," said Fernanda Vizeu, a SindipetroNF press officer. "Members want pay for all the days they were on strike, not half, and want a broader discussion of budget cuts and asset sales."

A previous split between SindipetroNF and its parent entity FUP in 2013 was resolved quickly she said.

FUP unions went on strike Nov. 1 in an effort to reverse Petrobras' plans to cut nearly $100 billion in capital expenditures over five years and sell $15.1 billion of assets by the end of 2016. The union was also seeking an 18 percent pay hike.

With Petrobras admitting to production cuts of as much as 13 percent from pre-strike levels, the walkout was the worst at the company in 20 years.

On Friday, FUP recommended a contract agreement that would give workers a 9.53 percent wage hike, back pay for half the days lost on the picket lines and the promise of a management-union committee to discuss budget cuts and assets sales.

SindipetroNF members are demanding that the committee's agenda be broadened to the issue of whether Petrobras should sell shipping unit Transpetro and natural gas unit Gaspetro.

Deyvid Bacelar, a FUP member and union representative on the Petrobras board of directors, said the decision by SindipetroNF could hurt their goals.

"The idea to suspend the strike was to gain time to develop support with members of the government and social movements," Bacelar said. "We were not going to achieve our demands on our own."


Read more at Reutershttp://www.reuters.com/article/2015/11/16/brazil-petrobras-strike-idUSL1N13B1ET20151116#umDS56Vc5ucAr8vB.99

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Brazilian police and prosecutors investigating corruption at Petroleo Brasileiro SA said on Monday they have evidence that bribes were paid as part of the state-run oil company's $1.2 billion purchase of Pasadena Refining Systems Inc in 2006.

At a news conference announcing a new round of searches, seizures and arrests, federal prosecutor Carlos Fernando dos Santos Lima said the bribes related to the U.S. Gulf Coast-based refinery could lead to the cancellation of the purchase.

After Monday's police operation, two were arrested and five brought in for questioning, prosecutors said, the latest twist in a nearly 20-month probe of price-fixing and political kickbacks at the company known as Petrobras.

"This case is important because, who knows, we might be able to annul the sale or recover assets belonging to the Brazilian public," Lima told reporters in Curitiba, Brazil where the investigation is being run.

The prosecutor did not say how a U.S.-based transaction could be canceled, but throughout the corruption prosecution, serious efforts have been made to return illegally diverted funds to the government or Petrobras.

The prosecutor said Petrobras lost $792 million in the purchase of the 100,000-barrel-a-day refinery from Astra Oil, a unit of Belgian-controlled Astra Transcor Energy. He also alleged that Petrobras overpaid for the facility, claiming it was in terrible condition when acquired.

Petrobras paid $360 million for half of Pasadena Refining in 2006, more than eight times what Astra paid for the whole refinery a year earlier. By 2012, Petrobras had sunk $1.18 billion into it including the cost of buying out Astra's remaining half after a legal dispute between both firms.

Lima cited evidence that Astra paid $15 million in bribes in the sale of the initial 50 percent of the Pasadena refinery to Petrobras in 2006.

Petrobras bought the refinery as its exports of Marlim-grade heavy crude and other oil blends grew, largely to the United States. It was hoping to capture extra profit for those exports by refining those exports into fuels such as gasoline. A congressional inquiry found that it paid far too much for the refinery.

"Besides being obsolete and in a terrible state, the refinery did not have the capacity to refine Marlim crude produced by Petrobras," a statement by the prosecutors said.

In Houston, a voice mail request for comment to Astra Oil Company LLC was not immediately answered. An Astra Transcor Energy employee in Rotterdam declined to comment. A corporate affairs official in Zug, Switzerland did not immediately return calls requesting comment.


Read more at Reutershttp://www.reuters.com/article/2015/11/16/brazil-petrobras-probe-idUSL1N13B0HV20151116#XFVI0E6RpVX4ajzf.99

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Trafigura Pte Ltd. disclosed $4.3 billion in oil-related payments to governments in 2013 as part of a push toward more transparency by the third-largest independent oil trader.

The firm said the funds were used to purchase crude oil, refined petroleum products and gas from national oil companies in countries that have signed up to the Extractive Industries Transparency Initiative, or candidate countries. It revealed payments made in Colombia, Ghana, Nigeria, Norway, Peru, and Trinidad and Tobago in its inaugural responsibility report.

The commodity trading industry, much of it centered in Switzerland where traders aren’t directly regulated, has long been noted for its opacity and lack of disclosure. While Trafigura is based in Singapore it has major operations in Geneva, as do closely held competitors Vitol Group -- the largest independent oil trader -- and Gunvor Group Ltd. In the past, the traders have cited competitive reasons for their furtive ways.

Trafigura is the first major independent commodity trader to report oil-related payments to member-states of the EITI, a voluntary disclosure program for oil and mining companies aimed at rooting out and preventing corruption. The report “sets out an ambition to become acknowledged leaders in our sector in the way we manage corporate responsibility,” Chief Executive Officer Jeremy Weir said in a statement. “It also expresses our awareness that we have more work to do.”

Trafigura’s decision to report payments comes amid a schism among members of Switzerland’s tight-knit commodity-trading industry, which accounts for about 4 percent of the nation’s gross domestic product.

The country that’s home to more than 500 commodity-trading companies has decided not to impose mandatory regulations on the sector despite calls to do so by non-governmental organizations. Government officials have encouraged other trading houses to join Trafigura in disclosing payments under the EITI framework to improve transparency.

http://www.bloomberg.com/news/articles/2015-11-16/trafigura-reveals-4-3-billion-in-oil-payments-to-governments

Image Source: Economic TimesPTI reported that cash-starved Niko Resources of Canada has decided to quit Reliance Industries' gas discovery block NEC-25, off the Odisha coast, by divesting its 10 per cent stake to the existing partners.

Niko said that "In the second quarter of fiscal 2016, the company elected to withdraw from the NEC-25 block and relinquish its interest to the remaining interest holders."

RIL is the operator of the block with 60 per cent interest while BP plc of UK has the remaining 30 per cent stake.

Niko's 10 per cent interest will be split between RIL and BP in proportion to their equity stake. Gas discoveries in North-East Coast block NEC-0SN-97/1 (NEC-25) hold recoverable reserves of 1.032 trillion cubic feet.

The Canadian company has been facing cash problems and had even put up for sale its interest in NEC-25 as well as 10 per cent stake in RIL's Krishna Godavari basin oil and gas producing block KG-DWN-98/3 or KG-D6. But it hasn't been able to find a buyer.

With the upstream regulator DGH not approving a USD 3.5 billion plan for developing gas discoveries in block NEC-25 in the absence of its prescribed tests to confirm two of the finds, the partners opted to do the test on one of the finds and relinquish or give up the other.

It said that "In the first quarter of fiscal 2016, the contractor group for the NEC-25 block elected to conduct a DST for one discovery in the block," adding that relinquishing its interest would eliminate the company's obligation to fund its share of the DST programme.

RIL had in March 2013 submitted a USD 3.5 billion Integrated Field Development Plan for producing 10 million standard cubic meters per day of gas from the discoveries D-32, D-40, D-9 and D-10 in NEC-25 by mid-2019.

http://steelguru.com/gas-oil/niko-resources-to-give-stake-in-nec-25-gas-block-to-ril-bp/439209#tag

The state’s Bakken oil region produced less oil in September than it did the previous year, the first time that’s happened in more than a decade. Output fell as low oil prices, exacerbated by the region’s remoteness, caused companies to scale back drilling operations and delay completing new wells.

North Dakota’s portion of the Bakken produced 1.11 million barrels a day in September, down 1.1 percent from the same month a year ago, according to state data. Half the oil left the state by costly truck and rail routes, forcing producers to offer steep discounts. Along with an overall decline in crude prices, that’s prompted drillers to idle 67 percent of the rigs that were in the region last year.

“The production drop was inevitable with the rig decline and the low-price environment,” Carl Larry, head of oil and gas for Frost & Sullivan LP, said by phone. “The cost of rail and trucking hasn’t gone down enough to keep production profitable, so it’s a precarious area to keep production steady or growing.”

The year-over-year decline was the first since August 2004, when the region produced just 1,500 barrels a day. The drop was set in motion nearly a year ago, when falling oil prices made oil companies curtail spending and idle rigs.

Companies that are drilling wells are waiting longer to complete them with hydraulic fracturing crews. The number of drilled but uncompleted wells, known as the fracklog, rose to 1,091 by the end of September, the first time it exceeded 1,000, according to data from state regulators.

The price drop was felt harder in North Dakota because there’s only pipeline space for a fraction of the state’s output. Pipelines are cheaper than rail or truck transportation, so sellers have to offer discounts to make up for the difference in transportation cost. Oil at the wellhead in the Bakken region sold for $29.74 a barrel Friday, compared with $37.40 in West Texas, according to the trading unit of Royal Dutch Shell Plc.

http://www.bloomberg.com/news/articles/2015-11-16/north-dakota-s-bakken-pumping-less-oil-for-first-time-in-decade

The moon was a waning crescent sliver Sept. 9 when a man emerged from an oil tanker, sidled up to a well outside Cotulla, Texas, and siphoned off almost 200 barrels. Then, he drove two hours to a town where he sold his load on the black market for $10 a barrel, about a quarter of what West Texas Intermediate currently fetches.

“This is like a drug organization,” said Mike Peters, global security manager of San Antonio-based Lewis Energy Group, who recounted the heist at a Texas legislative hearing. “You’ve got your mules that go out to steal the oil in trucks, you’ve got the next level of organization that’s actually taking the oil in, and you’ve got a gathering site -- it’s always a criminal organization that’s involved with this.”

From raw crude sucked from wells to expensive machinery that disappears out the back door, drillers from Texas to Colorado are struggling to stop theft that has only worsened amid the industry’s biggest slowdown in a generation. Losses reached almost $1 billion in 2013 and likely have grown since, according to estimates from the Energy Security Council, an industry trade group in Houston. The situation has been fostered by idled trucks, abandoned drilling sites and tens of thousands of lost jobs.

“You’ve got unemployed oilfield workers that unfortunately are resorting to stealing,” said John Chamberlain, executive director of the Energy Security Council.

In Texas, unemployment insurance claims from energy workers more than doubled over the past year to about 110,000, according to the Workforce Commission. In North Dakota, average weekly wages in the Bakken oil patch decreased nearly 10 percent in the first quarter of 2015, compared with the previous quarter, according to the Federal Reserve Bank of Minneapolis.

With dismissals hitting every corner of the industry, security guards hired during boom times are receiving pink slips. That’s leaving sites unprotected.

“There are a lot less eyes out there for security,” said John Esquivel, an analyst at security consulting firm Butchko Inc. in Tomball, Texas, and a former chief executive of the U.S. Border Patrol in Laredo. “The drilling activity may be quieter, but I don’t think criminal activity is.”

States are trying to get a handle on the theft, which can include anything from drill bits that can fetch thousands on the resale market, to copper wiring that can be melted down, to the crude itself. Texas lawmakers met earlier this month in Austin to craft a bill that would increase penalties related to the crime. A similar measure passed both houses of the legislature this year, but Republican Governor Greg Abbott vetoed it, saying it was “overly broad.” Lawmakers, at the urging of industry, are hoping to revive it next legislative session.

In Oklahoma, law-enforcement officers recently teamed with the Federal Bureau of Investigation to intensify their effort. In North Dakota, the FBI earlier this year opened an office in the heart of oil country to combat crimes including theft, drug trafficking and prostitution.

http://www.bloomberg.com/news/articles/2015-11-16/oil-theft-soars-as-downturn-casts-u-s-roughnecks-out-of-work