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A PetroChina logo is seen at a gas station in Beijing. China's oil majors will be looking this year at overseas acquisitions. Photo: Reuters

New | China’s oil and gas majors to keep an eye out for acquisition opportunities overseas

“We don’t think the Chinese national oil firms are in a rush to acquire in the short-to-medium term. They are focusing on capital expenditure and cost reduction,” BNP Paribas head of Asia energy research Por Yong-liang

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Mainland China’s state-backed oil and gas giants will likely be more active in looking at overseas acquisition opportunities this year to take advantage of sharply lower oil prices, after taking a breather last year amid corruption probes and an emphasis on spending and investment discipline.

Although the share prices of many potential targets have fallen to attractive multi-year lows, along with oil prices, analysts and lawyers who advise the oil majors said they will not be in a hurry to strike deals.

“We don’t think the Chinese national oil firms are in a rush to acquire in the short-to-medium term. They are focusing on capital expenditure and cost reduction,” BNP Paribas head of Asia energy research Por Yong-liang told the South China Morning Post. “Unlike 2009, their balance sheets now have more [debt] gearing.”

According to data compiled by Dealogic, outbound acquisitions by mainland firms in the oil and gas sector plunged 86.6 per cent last year to US$2.86 billion from US$21.25 billion in 2013, which was in turn 31.5 per cent lower than US$31 billion 2012. It was also much lower than US$16.2 billion of deals clinched in 2011 and US$24.6 billion in 2010.

In the five years to last year, the outbound deals totalled US$95.94 billion, highlighting Beijing’s desire to enhance security of the nation’s petroleum supply, as imports accounted for almost 60 per cent of last year’s consumption, up from 37 per cent in 2003.

Tom Deegan, a partner at law firm Sidley Austin, said while the majors have the capacity to be opportunistic in making acquisitions, they will only pounce on the opportunities if they fit within their broader business strategies.

“They won’t be randomly ‘bargain hunting’ across the globe, acquiring reserves as an end in itself,” he told the Post. “Also, it is unlikely that we will see a return any time soon to the mega deals we have seen them embarking on over the last decade.”

Since 2013, PetroChina and onshore rival China Petroleum & Chemical (Sinopec) have been trimming their spending on new projects and infrastructure to expand production capacity, especially on downstream oil refining and chemical production.

This was driven by a need to improve profitability and cashflows, as their project returns fell while debt has risen to uncomfortably high levels.

Since August 2013, when PetroChina was hit by a string of resignations of top-level managers who were investigated by the authorities on alleged corruption, deals flows have dwindled as management turned their focus on internal issues, while personnel changes did not help.

Sinopec and dominant offshore producer CNOOC have also been subject to investigations since late last year.

“The investigations into the affairs of the national oil firms are likely to have an overhang into 2015,” Deegan said. “The process is not fully completed ... the message from them is that transparency on all levels is absolutely key to any future acquisitions and projects.”

An Asian brokerage oil sector analyst said major strategy changes and transactions like acquisitions will likely take place when new top management comes in next year or in 2017.

Volatile oil prices also made deals hard to strike, as buyers and sellers sit on their hands waiting for more clarity on the global economy and how long the long-term oil price and their operations will be affected.

Por said potential sellers are unlikely to let go of their assets unless they are desperate due to prolonged periods of low cash flows stemming from depressed oil prices, or if their debt servicing costs rise substantially due to higher interest rates.

“The acquirers are still going to sit tight for a bit longer,” said Hilary Lau, a partner at Herbert Smith Freehills who advised on major mainland oil and gas deals. “Potential acquirers will be waiting for [the oil] price to stabilise while taking the time to gear up on their due diligence and to figure out which are the valuable assets that make for good buys.”

PetroChina’s spokesman said that given falling oil prices, the company will cut its capital expenditure.

“However, it doesn’t imply that we will refrain from overseas asset acquisitions. The key point is whether the acquisition targets are a strategic fit,” he said, adding it has been evaluating a number of projects.

Sinopec’s spokesman said it has not stopped looking at potential acquisition opportunities.

A CNOOC spokesman said the company’s “value-driven” overseas acquisition strategy means it must balance resources, return and risk when assessing each potential target.

 

 

 

 

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