Here is the article as published in the October 2014 issue of Petroleum Africa (www.petroleumafrica.com).
M&A Portfolio Adjustments
The future is bright for the mergers and acquisitions scene in Africa. 2014 has been another busy year for the lawyers, financing houses and technical evaluators. Here we take a bird’s eye view of what has been happening in all areas of the exploration and production (E&P) lifecycle over the last year or so. The continued divestment by some of the majors of oil fields and marginal fields in the Niger Delta has dominated the last 12 months. New and potential developments, including projects in Namibia, Mozambique and Tanzania are attracting interest from multi-nationals and African companies alike. Exploration campaigns in new and under-explored basins continue to reap success and attract participants from all over Africa and further-a-field.
Mature Assets and Portfolios
What has become clear from recent divestment opportunities is that there is a hunger and excitement for improvements to, and expansion of, mature producing assets that are up for sale or divestment. While the existing production is the value-driver in the deals, it is the potential for increasing that production by relatively small investment projects that is attracting such a large and varied interest, much of it from nontraditional players.
Opportunities for recompletions, infill drilling and low risk near-field exploration add substantially to the potential of these complex, mature fields. Improved technology and intelligent reservoir management strategies such as smart completions, multi-lateral wells and oil rim management are proving to be highly successful in maintaining or boosting production and increasing reserves. Such projects sit alongside near-field exploration campaigns which often target low risk blocks, further de-risked by new 3D seismic data. None of this is new, but it is the appetite for further development and the increased indigenous interest that is new and refreshing.
There are of course challenges to the new owners. The recent outbreak and spread of Ebola in West Africa is a reminder that nature has no concern for economic growth. Also, leaks and organized illegal taps on pipelines continue unabated and now account for an estimated 20-30% in loss of production. The security issues and associated environmental problems, that threaten key infrastructure and facility installations continue to be a worry for all stakeholders in the assets, even more so with the recent developments in Libya and Nigeria.
Pipeline integrity and access is complicated further by operational concerns. Where previously a clear organizational and management system was in place, the diversification of operators and participants has led to some uncertainty surrounding availability, accountability, and tariffing. It may take a few years before a working system emerges, and it will require a concerted effort from all parties to pool resources and establish a framework for tackling these issues.
Some of these aspects are difficult to quantify as part of the valuation but they feature heavily in the negotiations of commercial deals; and these deals can be big. Large asset and infrastructure sales attract billion dollar price tags requiring substantial project finance and debt funding.
At the other end of the scale is the smaller deals with farm-in values of a few million dollars, typically for older discoveries that could not compete with the low-hanging fruit of the large projects of many of the super majors.
In this context, a World Bank initiative has also helped to get some smaller projects off the ground, encouraging local participation in production. The recent local content laws in Nigeria have led to a huge rise in local interest in M&A activity. What has surprised many people is the strength and depth of funding that many African companies have been able to develop. It is testimony to their entrepreneurial spirit that they are able to form smart technological and financial partnerships to back their bid. For the moment funding is available but these pockets are not endless and volatility in the Chinese and greater Asian markets may ripple through to Africa.
High activity levels in exploration over recent years are paying dividends. New fields mean new developments and, excitingly, new hub opportunities. For new entrants the prospect of participating in major projects is appealing. Encouragingly, the developments on the horizon are diverse and located across the continent, not just clustered around one basin.
Some developments are relatively straightforward such as look-a-like projects in tried and tested areas and these form strong candidates for M&A activity. Projects that once appeared technically challenging, for example, deep-water FPSO developments, now have an established presence in the African E&P landscape. However, security issues such as piracy are also more common place. On the positive side, access to local technical and logistical experience is continuously improving the timeline and do-ability. Once again, local content laws are helping with this. Gaining funding for such projects is still a challenge as the technical risks and the price tag remain significantly higher than in the onshore environment and there have been recent examples of reservoirs underperforming.
Some of the potential developments are completely untested in their region, such as potential LNG projects. Many investors are keen to be early participants in such opportunities, securing a foothold in what could turn out to be a lucrative project. The returns look good but the risks are high and interested parties should expect more turbulence related to changing local and global market demands. An added uncertainty here is how high the hurdles will be set for sanction approval by the government.
The opportunities are significant and it is quite right that such high profile projects should attract increased scrutiny. Many governments new to the E&P industry are keen to set a precedent of establishing good oil field practise and encouraging robust health and safety norms. Setbacks at a late stage in the sanction process can have a devastating effect on the funding capability of small players.
Exploration activity in new and existing plays remains high. A shift in focus from exploration to appraisal in some areas indicates the increased confidence in the prospectivity of the basin strengthening the long term future of hydrocarbon production in the area. Compared to the mature asset sales described above, the level of funding required for a stake in an exploration opportunity is substantially lower. This allows potential farm-inees to spread the risk by investing in a wider portfolio.
The valuation of exploration opportunities is much less transparent than for an asset with proven or contingent resources. Prospects can be de-risked by applying good technologies, such as 3D seismic data, but it is usually the absence of infrastructure that prompts concerns.
However, the continued drilling success backed up by robust flow test results is providing a very positive backdrop within which to scout for exploration opportunities.
Behind the Scenes
The acquisition and disposition (A&D) of assets requires input from large, multi-disciplinary teams. Asset valuations require technical specialists, contracts and procurement, health and safety, planners and economists. Their job is often a challenging one: timelines tend to be short and expectations are invariably high. Behind the price tag the lawyers, financial specialists, and negotiators organize all the moving parts of project finance. Balancing uncertainty and potential on the one hand, and exposure and returns on the other is hard enough with only a small number of investors. Asset sales involving multiple parties, each with their own risk profile, become exponentially more complex – although some would say more exciting.
There is certainly no reason to complain. As a provider of A&D technical services, AGR has been heavily involved in numerous asset valuations and due diligence reporting over the last two years. And from all the indications, there are no signs of things slowing down.
All rights to editorial matter are reserved by Petroleum Africa Magazine, Inc. and no article may be reproduced or transmitted by any means without the prior written permission of the publisher.
AGR will be exhibiting during the Africa Oil Week, booth #76.
More information about our subsurface skills, please click here