Brazilian M&A Picks Up as Asians Seek Cheaper Oilfields
Brazilian energy acquisitions, on a steady decline after a record $57 billion deals in 2010, are showing signs of a revival, led by Chinese and Malaysian state-owned buyers seeking lower valuations for offshore oil fields.
Malaysia’s Petroliam Nasional Bhd. agreed May 7 to buy assets in the Campos basin from a company billionaire Eike Batista controls. China National Petroleum Corp. is in talks to acquire Barra Energia Petroleo e Gas, a Brazilian oil startup, for about $2 billion, people with knowledge of the matter said.
Batista’s OGX Petroleo (OGXP3) & Gas Participacoes SA, which tumbled 54 percent in the past three months on missed financial and production targets, got $4.50 a barrel in the sale of an oilfield stake to Petronas, compared with a Campos basin reference price of $10 to $13, according to Tudor Pickering Holt & Co. Brazilian oil producers trade at an average of 0.86 times book value compared with 2.43 a year ago and 6.65 for North American peers, according to data compiled by Bloomberg.
“The Latin American market is very cheap right now, valuations have come in a lot,” said Matthew Portillo, a director of equity research for exploration and production at the Houston-based firm. “There was a lot of exuberance and valuations got expensive and as either disappointment has set in on some assets or companies have been successful, that’s driving back interest in the region. Brazil is one area of focus.”
The MSCI Brazil Energy Index, which includes OGX and Petroleo Brasileiro SA, the country’s state-run producer, has rallied 16 percent in the past month after slumping 47 percent in the previous two years. The real has gained against 2.3 percent on the dollar this year after losing 9.1 percent and 11 percent in the past two years.
Excluding a possible $2 billion CNPC deal, the $985 million in oil and natural gas deals so far in the quarter makes it the biggest in six quarters, according to data compiled by Bloomberg.
Petrobras, as the state producer is known, is helping ease pressure on assets sales as it seeks to sell smaller properties in Brazil to raise $9.9 billion. Those plans have been slowed as potential buyers await the government’s first oil auction since 2008. Petrobras, the world’s most indebted publicly-traded oil company, said it will be “selective” in placing bids in next week’s so-called Round 11 auction.
China and Malaysia need to secure energy resources to keep their economies growing faster than those in Europe and the U.S. China is on course to overtake the U.S. as the world’s top crude importer by 2014, OPEC said last month. China, the world’s fastest-growing major economy, is projected to account for half of all demand growth in the next five years.
“Increasingly the national oil companies, especially Asian ones with the financial muscle, are making acquisitions in the name of energy security,” Praveen Kumar, a Singapore-based consultant at FACTS Global Energy, said by telephone. “Brazil right now is hot. Companies that have invested there have made some successful discoveries, so the buzz these days is how they can bring back that energy into Asia, in the form of LNG or crude.”
Petrobras announced in 2007 the discovery of the so-called pre-salt oil reserves, the biggest offshore find in the Americas since 1976. To help fund development, the state-run producer held a secondary share offering in September 2010 that raised a record $70 billion. Investor interest in Brazilian oil led OGX, HRT Participacoes em Petroleo SA and QGEP Participacoes SA (QGEP3) to go public between 2008 and 2011.
Petroliam Nasional Bhd., known as Petronas, will pay $850 million for 40 percent of two blocks in the Tubarao Martelo field, the company said in an e-mailed statement. That’s lower than the $1 billion OGX was seeking, according to comments last month from a person with direct knowledge of the matter. An OGX press official declined to comment in an e-mailed response to questions.
Tudor Pickering’s estimate of the Tubarao Martelo sale price of $4.50 a barrel on a risk-free basis compares with Deutsche Bank AG’s $11.88 estimate. Credit Suisse AG estimated that China Petroleum & Chemical Corp (386), or Sinopec, paid Repsol SA (REP) $5.90 a barrel of oil equivalent for 40 percent of its Brazilian assets in 2010. Goldman Sachs Group Inc. estimated at the time that Sinopec paid $8.70 a barrel. Sinochem’s 2010 purchase of a stake in Statoil’s Peregrino field in the Campos basin cost $15.40 a barrel, according to Arctic Securities ASA.
The Petronas acquisition marks the company’s first entry into exploration and production in Brazil and followed a $5.4 billion deal last year to take over Canadian producer Progress Energy Resources Corp.
Under the agreement, Petronas has the option to acquire a 5 percent stake in OGX from Batista at 6.30 reais a share. This option can be exercised until April of 2015 and no new shares would be issued, OGX said in a separate statement.
As more assets come up for sale, offshore Brazil may be a perfect fit for Asian national oil companies looking out for more than just the bottom line.
“What really keeps Beijing awake at night is that oil demand is growing faster than domestic production, so they need to buy upstream assets globally,” Simon Powell, an oil and gas analyst at CLSA Ltd. Hong Kong, said. “They also want to acquire intellectual property, and the Chinese are especially keen to get any deep water expertise they can.”
Anadarko Petroleum Corp. is working on a possible sale of its Brazilian assets and a transaction is possible in 2013, Chief Financial Officer Bob Gwin said on a May 7 conference call with analysts and investors. The process is still in the early stages, he said.
“CNPC and Petronas are both looking at the pre-salt fields in South America and think it’s interesting, it’s deep water and they need to be involved,” he said. “At the same time it helps them hedge against future demand risk at home.”
As the U.S. has benefited from increased oil production due to new technologies unlocking massive untapped reserves and little or no demand growth, Asian countries are looking farther afield to feed their growing economies.
“While U.S. refineries have been busy processing higher quality grades of crude from the tight-oil boom, companies producing Brazilian crude can get a better price by bringing the lower quality grades to Asia,” said Yeo Yu Kin, a director at IHS Consulting in Singapore. “Brazilian oil would love to find a home in Asia.”