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    Editorial: Demergers and non-acquisitions [NGW Magazine]


Low prices and new policies force a fundamental change of priorities. [NGW Magazine Volume 5, Issue 11]

by: NGW

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Top Stories, Insights, Premium, Editorial, NGW Magazine Articles, Volume 5, Issue 11

Editorial: Demergers and non-acquisitions [NGW Magazine]

The extent of the plight of the international oil companies – and their shareholders – has been emphasised in recent weeks by the sudden proliferation of talk of asset sales. Financial discipline is the watchword: debt must be paid down to cover dividends, reduce gearing and perhaps finance extensive downsizing, restructuring and decarbonising. And the sales are not only oil: quite a few are gas, the must-have commodity in every IOC’s portfolio.

These deals or rumoured deals have all come as the oil price appears for now to be out of the woods. This is admittedly, a highly relative. The trend however is up, with Brent at close to $40/barrel at time of writing, and this may even start to pique the interest of US shale oil producers.

Just taking into considering the retrenchment of European companies, Norwegian Equinor and French Total have both quietly handed back deepwater oil assets in Brazil to the government; and Total might also be secretly relieved by the Algerian government’s rejection of its deal with Occidental.

Similarly, Neptune declined to go ahead with its purchase of Edison’s North Sea assets, offered by Energean for whom they were of less interest.

On the unconfirmed side, Shell is downsizing its Queensland LNG infrastructure business but apparently for now it believes that deepwater oil is still one of its growth pillars: its Brazil assets remain on its books. And BP is said to be selling down its tight gas project in Oman, which one might have thought would be a safe haven.

BP is also now so keen to sell some of its North Sea assets, in this case to Premier Oil, that it is accepting much more of the disposal costs, while retaining interim cashflow from them as an offset; but also it has agreed a much lower headline price, assuming the deal does complete in September. That price will rise if the oil price goes above $55/barrel for long enough, but the increase is capped at $110mn and still seems a remote prospect. But the sale will still help the major chip away at its debt. This September it is planning to restructure, with headcount to fall and the likely need to invest further in decarbonisation.

But perhaps the most dramatic signal of change comes from Italian Eni, which is separating its natural resources from Energy Evolution (EE). This might be taken as preparation for a sale of the entire hydrocarbons business. EE will focus on growing power generation from renewable energy and biomethane, co-ordinate the bio and circular evolution of Eni’s refining system and chemical business, and develop Eni’s retail portfolio.

Something similar happened in the UK in the late 1990s when out of the privatised British Gas, three companies – BG E&P, Centrica and the pipeline businesses – were born. Each business needed a CEO to develop freely.

Of the three, only Centrica remains intact, admittedly now in very poor shape and expected to lose its place in the list of top UK companies. But it did at least retain plenty of upstream gas, which it added to when opportunities came along.

What EE’s protection will be is unclear: but it appears to be a risk that both E.ON and Engie have taken, in varying degrees, selling off to decarbonise. Perhaps it is pinning its hopes on superior customer service and a lack of real competition: but whatever people may claim to feel about the environment, price nearly always comes first when they weigh up their options. At least initially the two businesses will be closely linked. And the upstream part will, even as it becomes more gassy, also develop carbon mitigation schemes such as capture and storage.

Generally, ‘natural resources’ is now a business category that is out of favour. In just the last few weeks, a number of companies have shed the oily part of their names, following the path of Statoil and, much earlier than that, British Petroleum. Energean has lost Oil & Gas; EnWell Energy is the new Regal Petroleum; and Cluff Natural Resources will be Deltic Energy later this month. Is anyone betting on Gazprom, Rosneft and Lukoil doing anything similar?

But behind the smoke and mirrors, it is not all bleak, particularly for those companies that took the precaution of hedging or who are yet to start up operations. There are still plenty of deals to be cut for those with the confidence in the future demand growth of gas.

Several minnows said they are interested in acquisitions as low commodity prices leave producers stranded. Deutic, whose southern basin gas resources continue to hold the interest of Shell as partner and operator, says it has other, substantial discoveries that have also caught the attention of substantial potential farm-in partners. And some sales may be easier in cases where producers seek to quit the upstream for pastures greener.  

Like it or not, molecules will be vital in meeting future sustainable and affordable energy needs but there is still regulatory risk to be overcome.

“The EU is put to the test on both the climate and economic fronts,” the International Association of Oil & Gas Producers told senior energy officials at the European Commission, presenting them with a list of solutions ready to be deployed June 5. The Commission can count on our industry to deliver on both objectives. The only thing we asked for,” it said in a statement, “is an open-minded policy framework that gives us a fair chance to do so, without compromising the end-goal that is climate neutrality by 2050.”