Afternoon:
8°c
The Deal is back. Kraft's unsolicited £10 billion bid for Cadbury. The merger of T-Mobile and Orange to form Britain's largest mobile phone operator. Investment bankers are slavering after 18 months of what former senior Tory Alan Duncan might term “living on rations”.
Yet in truth the big deals in the energy sector never went away.
At the height of the banking crisis and credit crunch last autumn, EDF paid £12 billion to take over British Energy, with Centrica putting up £2.3 billion for a 20% stake. Then just last month Centrica took control of North Sea gas explorer Venture Production in a deal worth £1.3 billion.
But even that deal has been dwarfed by recent action amongst London's legion of oil and gas companies.
Addax Petroleum, not long on the market, was snapped up by Sinopec of China in an $8.8 billion deal. Heritage Oil, the new kid on the block among London's larger independents, is in the middle of a $6 billion all-share deal to take control of Turkey's Genel Enerji, which is set to become the largest oil producer in the Kurdistan region of Iraq.
According to industry consultant IHS Herold, the number of oil and gas deals worldwide in the second quarter of 2009 nearly doubled from the first three months, rising from 30 to 58.
Yes, that first quarter was a 10-year low but that is in a sector which has been in almost permanent consolidation as the industry became awash with cash on the back of a surging oil prices.
The re-emergence of the strong oil price, currently historically high at more than $70 a barrel, surging equity markets and the first signs of loosening credit terms are all playing their part, says the consultancy.
Drilling into the figures indicates where the action is: notwithstanding the $20 billion defensive merger of the Canadian giants Suncor and Petro-Canada earlier this year, the North American market is relatively moribund despite historically low asset valuations on stocks.
Instead the action is in Europe, the Middle East and Asia. And two in every five deals are being done by state-controlled national oil companies, typically the Chinese giants and Gazprom of Russia.
Which puts the spotlight on the perennial bid talk around London's larger quoted indies, whose interests are spread around the world and whose numbers have already been reduced in the past 12 months by the fall of Venture and sizeable deals for Burren Energy and Imperial Energy, which went to ENI of Italy and ONGC of India respectively.
According to the oils desk at Nomura, despite a recent surge in the shares of European explorers, these companies' valuations are still lagging renewed oil price strength by around 30% — even before M&A tittle-tattle is factored in.
A bidder for Tullow Oil, Cairn Energy, Heritage Oil, Premier Oil and Dana Petroleum could offer a 20% premium to current prices and still get themselves a bargain. The latest chit-chat is that ENI the serial predator of the UK quoted sector having taken over Lasmo, British-Borneo, Burren and First Calgary in the last decade, is growing ever keener on sub-Saharan Africa where many British indies are present.
Meanwhile CNPC of China is said to have raised $30 billion dollar from the China Development Bank to head west and sweep up likely targets.
But if The Deal is really back then so talk of the biggest deal of the lot will return. BP and Shell is a merger that the accountants and the investment bankers insist, properly managed, would in the medium term produce a far financially healthier organisation.
Culturally however it remains a non-starter and it would be an assignation fraught with regulatory hurdles. Both of those factors would determine the need for a leader of Herculean management appetite.
But the other big deal to be done is BG, the international oil and gas explorer and liquefied natual gas global leader. BP and Shell should be looking and others undoubtedly are. Tupi and now its Gaura supergiant finds off the coast of Brazil is putting BG on the map while JP Morgan is just one research house which says the company's stock is a giveaway at present because no-one is properly valuing its Australian LNG assets acquired over the last two years.
If The Deal is back, expect the energy sector to burn bright this autumn and winter.
