KNOC Loses Race for Addax, But Has Edge on China Peers

Dow Jones Newswires

SYDNEY (Dow Jones Newswires), Jun. 25, 2009

By losing out in the race to land Addax Petroleum Corp., state-run Korea National Oil Corp. has seen its options shrink if it wants to reach a goal of sharply hiking oil output by 2012.

However, KNOC's reluctance to match China Petrochemical Corp.'s US$7.19 billion offer for Addax may also reflect a major advantage over its Chinese rival: the possibility of looking for acquisitions in the U.S.

Consolidation in the oil sector over the past decade has left Asian companies with a dwindling number of targets with valuations between $2 billion and $10 billion. Many of the companies still independent are either based in the U.S. or have significant oil and natural gas assets there.

This is important as Korean companies including KNOC have struck a dozen deals for U.S. energy companies since 2005 with a combined value of $2 billion, according to data provider Dealogic.

The biggest was a $1-billion deal signed by a Korean consortium comprising KNOC and Samsung Corp. in February 2008 with U.S. company Taylor Energy for an offshore oil field in the Gulf of Mexico. The field, which produces 17,000 barrels a day, is the largest producing foreign oil field that Korean firms have acquired, South Korea's government said at the time.

In contrast, Chinese energy companies haven't clinched a single deal for a U.S. oil and gas or utility asset in the same period, likely due to ongoing worries about a political backlash. In 2005, Cnooc Ltd., China's third-largest oil producer by capacity, dropped its $18.5 billion bid for Unocal Corp. in the face of criticism from U.S. Congress.

Borrowings Plan

Under an expansion plan unveiled last year, South Korea's government set KNOC a target of lifting production to 300,000 barrels a day by 2012 from 50,000 barrels a day at the end of 2007.

"In high risk, capital- and technology-intensive oil development businesses, size directly leads to competitiveness and it serves as a prerequisite for participation in (oil development) projects," South Korea's Ministry of Knowledge Economy said.

Output of 300,000 barrels per day would rank KNOC around the middle among global oil companies. In comparison, Exxon Mobil Corp. , the world's largest oil and gas producer by sales, produced 3.9 million barrels of oil equivalent per day in 2008.

A person familiar with the talks said KNOC had offered up to KRW8 trillion ($6.3 billion) for Addax, and U.S. producers would likely come on to the company's M&A radar in the wake of the failed bid, along with those firms with oil fields in Africa and South America.

A recent research report issued by KNOC named Peru, Brazil and Colombia as the best destinations in South America for energy investments by South Korean firms.

KNOC could try to cherry pick individual assets, such as producing oil fields. But buying oil companies would give them access to technology and a skilled workforce, he said, helping them to close a gap with major global players.

KNOC may find it easier to do deals in the U.S. because it is willing to compete on a level playing field with U.S. companies when it comes to financing, rather than relying on state funds offered at a preferential rate of interest.

Earlier this year, KNOC Chief Executive Kang Young-won said the company plans to raise all the funds it needs for acquisitions this year via overseas borrowings.

KNOC is looking to raise $1 billion from a five-year senior unsecured bond sale, two people familiar with the matter said this month.

One of the people said the planned offering aims to fund the company's M&A activity. KNOC recently selected Bank of America Merrill Lynch, J.P. Morgan, BNP Paribas, Barclays Capital, Deutsche Bank and Korea Development Bank as the lead managers for the bond sale.

However, Chung Woo-jin, senior research fellow at the resource development research division of Korea Energy Economics Institute, said KNOC would struggle to compete with Chinese companies in doing big deals.

That's because KNOC needs to generate a return on its investment, while Chinese companies are set solely on adding barrels to their bottom line whatever the cost.

Momentum For Deals

The decline in prices of light, sweet crude on the New York Mercantile Exchange since a peak above $147 a barrel in July last year has driven down company valuations.

In addition, tighter access to financing has prompted many Western oil companies to seek partners for assets that they would otherwise have developed by themselves.

This has provided Asian oil companies with the impetus to chase deals that give them scale.

Analysts say there are only a handful of companies with enough production to "move the needle" for the likes of KNOC. These include Canada's Talisman Energy Inc. and Nexen Inc., Australia's Santos Ltd., and U.S. producers such as Anadarko Petroleum Corp.

Addax fitted the bill because it produced an average of 136,500 barrels a day last year.

"There is a lot of overlap in terms of the assets and companies of interest to Asia national oil companies," said Gavin Thompson, a Beijing-based oil consultant for Wood Mackenzie.

"It is not unusual to hear that whatever target KNOC is looking at, for example, the Chinese companies are also looking at it, as is India's Oil & Natural Gas Corp."

KNOC's oil exploration and production footprint extends to more than a dozen countries, including Canada, Nigeria, Russia, the U.K. and Indonesia.

Another attraction of bidding for Addax was the Taq Taq field in northern Iraq, which isn't too far from the Bazian Block that KNOC is taking the lead in developing via a 50.4% stake. Taq Taq produces 40,000 barrels a day, though peak output is envisaged at 180,000 barrels a day. KNOC also has stakes in seven other blocks in Iraqi Kurdistan.

Should KNOC fail to clinch a big corporate acquisition then it has other avenues open to reach its 2012 oil output target, analysts say.

One is to do individual asset deals, though it takes longer to achieve the same growth. Another option is to farm into existing projects in highly prospective areas like the Middle East, Canada or Venezuela.

South Korea signed a memorandum of understanding with Venezuela in March to cooperate in exploring, developing, and producing oil and gas. Venezuela's Oil Minister Rafael Ramirez requested KNOC participate in the development of an oil field in the Orinoco Belt area that produces more than 200,000 barrels a day.

In February, KNOC and Colombia's state-controlled Ecopetrol jointly purchased Peru's PetroTech Peruana SA for $900 million.

(Shin Jung-Won in Seoul contributed to this story)

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

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