Valuations to drop as Oil & Gas divestment activity enters into buyers’ market

The oil and gas industry is entering into a buyers’ market with more measured valuations, as the oil price slump impacts divestment and M&A deals in 2015.

According to Rolake Akinkugbe, VP and head, Energy and Natural Resources at FBN Capital, in an emailed response to questions from BusinessDay, “Divestment deals forecast in the Nigerian market in 2015 are probably more in the region of $1-$2.5bn, much smaller than in recent years, due to the depressed global oil price environment.

“Brent has probably not reached its medium term floor yet, so we’re really moving into a buyers’ market, where sellers have to readjust their price expectations, and demonstrate enough value and upside in their assets to be in with a chance of securing juicy premiums”, Akinkugbe adds.

Divestment deals in the local oil and gas industry hit $6 billion over the last couple of years, with valuations soaring to a record $1.7 billion for the Oando-Conoco Phillips deal.

“Major IOCs divesting their participating interest has been the major driving force for M&A activity in the Nigerian upstream sector. There has been over $6 billion realised in value between 2010 and 2013 through asset sales and between $4 billion and $8 billion in potential sales yet to be completed,” said CBO Capital in a research note.

Even as indigenous oil and gas firms approached foreign capital markets to raise financing for these deals, local investment banks also stepped up to participate in the high value deals recorded, berthing a new era of investment banking in Nigeria.

Foreign financiers also came into the country to take advantage of this wave of acquisitions.

The Financial Times reported that sovereign wealth funds such as Temasek of Singapore, and commodities trading houses such as Geneva-based Mercuria moved in to ease the completion of future deals.

Coming from such highs recorded, the present oil price slump presents a valuable opportunity for local oil companies looking to acquire IOCs’ assets waiting to be divested. “We will see…more deals because those companies who are cash rich will be looking to extract value through snapping up cheap assets”, Akinkugbe explains.

She also points out that we will see smaller ticket sizes per deal, in line with lower valuations to be expected.

Energy analysts point out that even as we continue to see exits from traditional parts of the value chain, the sweet spot remains production.

“I think assets that are still risked or at exploration phase may shed some premiums, whereas those in production will for the most part, remain attractive, given that prospective owners won’t have much to do”, says Akinkugbe.

The only problem, she points out, is there may not be many of these assets up for grabs.

Nonetheless, the Nigerian oil and gas industry remains valuable for investments. “There are enough opportunities in the Nigerian market, and moreover E&P development costs in other regions of the continent are up to 30 percent higher than in Nigeria in many cases, plus options for producing assets elsewhere in Africa are few and far between. The bulk of production assets are in Nigeria and Angola – both countries account for close to 75% of total SSA production. Nigerian companies that have strong exploration capabilities can certainly benefit from the potential reserves upside in African assets”, says Akinkugbe.

The local oil and gas companies that stepped up to acquire IOCs’ divested assets include ND Western Ltd, which took over Shell Nigeria’s Oil Mining Lease (OML) 34; Elcrest E&P, which took over Shell Nigeria’s OML 40; and Shoreline Natural Resources Ltd, which took over Shell Nigeria’s OML 30.

Others are Lekoil, which took over Panaro Energy’s OML 113; and Seplat plc, which took over the Shell Nigeria-led consortium’s assets of OMLs 4, 38 and 41.

Yinka Abraham