Little Action for China's Oil Deals

Heard On The Street: (THE WALL STREET JOURNAL ASIA via Dow Jones), Oct. 21, 2009

Advising Cnooc on mergers and acquisitions can't be the easiest job in the world, but the air-mile tally must be terrific.

A month ago, reports emerged that the Chinese state-owned oil major was sniffing around stakes in Nigerian oil fields. Then it was said to be competing with ExxonMobil for a stake in a big field off Ghana. Now the company is said to be in talks with Norway's StatoilHydro about a deal in the Gulf of Mexico.

It might sound as if Cnooc is busy vacuuming up the world's oil reserves. But neither the Nigerian nor Ghanaian situations look particularly promising for it. The Statoil deal is just talk for now. Another deal involving Cnooc, to buy Marathon Oil's stake in an Angolan field, appears to have been stymied by Sonangol, Angola's own national oil company (NOC).

Indeed, for all the talk and Western uneasiness, actual deal activity by China's oil majors remains surprisingly low. Neil Beveridge at Sanford Bernstein reckons Chinese and Indian NOCs have accounted for less than 5% of global energy mergers and acquisitions over the past five years.

While that proportion spiked to 35% in the second quarter of 2009, according to IHS Herold, that largely reflected one deal, Sinopec Group's $7.2 billion acquisition of Canada's Addax Petroleum.

Indeed, despite the turmoil brought on by lower energy prices this year and the credit crunch, larger oil majors, be they NOCs or international oil companies (IOCs), haven't gone on a buying spree. The number of deals in the exploration-and-production sector rose in the third quarter but was down sequentially and year-over-year in terms of value, according to IHS Herold.

In part, this reflects the peculiar nature of this downturn. Having been relatively slow to respond to the decade's runup in oil prices, the larger oil companies now contend with tighter financing, big capital-expenditure programs and big shareholder expectations. BP has borrowed to pay for dividends, while ConocoPhillips, a serial acquirer in years past, has turned inward to restructure.

Exxon still has financial firepower, but its famously disciplined approach to acquisitions probably precludes big corporate deals. And, in retrospect, even it didn't move quickly enough during the brief window of sub-$40 oil prices this year.

Kick-starting M&A from IOCs might require another stomach-churning drop in the oil price, though that also would depress valuations. Investors in smaller energy companies hoping a big buyer will come knocking in the near future will probably have to rely on the NOCs playing the M&A game with a bit more finesse. Yet even if the likes of Cnooc enjoy the implicit financial support of deep-pocketed governments, suspicion of their political masters' motives limits their ability to splash out.  

Copyright (c) 2009 Dow Jones & Company, Inc.

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