Oil and gas acquisitions are on track for the weakest quarter since the end of the financial crisis as Asian companies bought fewer assets.
Deals announced in the industry worldwide slipped to $18 billion since April, the least since the final quarter of 2008, Bloomberg data show. Chinese, Korean and Malaysian buyers, who accounted for about 20 percent of all energy mergers in 2010, purchased $1.8 billion of assets in the second quarter, 30 percent of the $6 billion quarterly average the past two years.
Oil’s rally to $114 a barrel in May, higher U.K. taxes and concern the global economy is weakening have discouraged deals. The International Monetary Fund cut its forecast for global growth this year because of Europe’s debt crisis and the risk of a slowdown in the U.S. recovery.
“The global economy is a bigger issue for deals than the oil price,” said Christine Tiscareno, an equity analyst at Standard & Poor’s in London. “It’s a year for companies to ask themselves whether they really want to sign agreements if the economy is slumping.”
“There’s still appetite from Asian companies and no lack of finance,” said Colin McLean, chief executive officer at SVM Asset Management Ltd. in Edinburgh, who oversees about $900 million in securities. “I don’t think M&A is over for this cycle, it will pull back.”
Sinopec Buys LNG
China Petroleum and Chemical Corp., known as Sinopec, in April bought a 15 percent stake in ConocoPhillips (COP) and Origin Energy Ltd. (ORG)’s liquid natural gas project in Australia for $1.5 billion, the Asian country’s biggest purchase of the quarter. The largest deal worldwide was KKR & Co.’s sale of its Eagle Ford assets to Marathon Oil Corp. (MRO) for $3.5 billion. Transactions for shale gas properties in the Eagle Ford area of Texas accounted for 20 percent energy deals in the quarter.
The price of Brent crude, the benchmark for two-thirds of the world, averaged $117 a barrel in the three months through June, the highest since the third quarter of 2008.
“Analysts have been raising their long-term oil-price assumptions, so valuations of assets have been creeping up,” said Ivor Pether, a fund manager at Royal London Asset Management. “You can see why buyers might have been more cautious if their view on the oil price is less bullish.”
M&A in the oil industry has slumped even as global transactions remained little changed from the first quarter. Global activity was $637 billion in the quarter, led by Johnson & Johnson (JNJ)’s $19.4 billion acquisition of Synthes, Inc., a maker of orthopedic devices.
U.S. companies bought $7.1 billion of oil and gas assets since March, compared with a quarterly average of $16.3 billion over the past two years.
In the U.K., a new tax on North Sea oil profits may have stopped deals. Chancellor of the Exchequer George Osborne in March raised the levy to 62 percent from 50 percent, a move that Oil & Gas U.K., the industry lobby group, said will stymie sales and investment. The tax hit Korea National Oil Corp., which last year spent about $3 billion in a hostile takeover of North Sea explorer Dana Petroleum Plc.
Concern the global economy is slowing may also weigh on sales. The International Monetary Fund on June 17 lowered its forecast for global growth to 4.3 percent from 4.4 percent.
The economic recovery last year pushed energy consumption to rise at the fastest pace since 1973. The acceleration was driven by China, which overtook the U.S. as the biggest consumer, BP Plc (BP/) said in its Statistical Review of World Energy report published June 8.
The Chinese central bank has raised interest rates four times since October and bolstered banks’ reserve requirements nine times to rein in inflation. Premier Wen Jiabao said last week that price gains are under control, signaling an end to monetary tightening in China may that fuel global expansion and encourage more energy deals.
“There has been a lot of buying by Asian companies and those acquisitions need to be integrated,” said Alex Grant, managing director in oil and gas at Jefferies Group Inc. in London. “But these issues are temporary and we don’t see the trend of Asian companies buying assets as changing in the long term.”
India is also pursuing energy assets overseas. GAIL India Ltd. (GAIL), the nation’s biggest natural-gas distributor, said June 9 that it may spend as much as $2 billion on acquisitions, including shale gas assets in the U.S. and Australia, to meet fuel demand in India. Oil & Natural Gas Corp. and Oil India Ltd. (OINL), the biggest state-run explorers, are pooling at least $8.5 billion of cash reserves as they compete with rivals including China’s Cnooc Ltd. (883)
“There hasn’t been as much M&A as we would have expected,” said SVM’s McLean. “There’s still scope for more.”
To contact the editor responsible for this story: Will Kennedy at firstname.lastname@example.org