Majors Flood Weak Market With Assets

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The world’s biggest oil and gas companies are looking to cast off billions of dollars of assets to fund investment programs and pay dividends over the next few years. But with buyers facing the same uncertainty as the rest of the industry over future commodity prices, constrained investor appetite and environmental, social and governance (ESG) demands, who will have the appetite for assets the majors deem marginal? The five Western majors -- BP, Royal Dutch Shell, Total, Exxon Mobil and Chevron -- are collectively pursuing at least $75 billion worth of asset sales, but this is a moving target. BP this month rolled out a new divestment objective of $25 billion for 2020-25 to help bring its gearing ratio down, including up to $13 billion of outstanding proceeds already raised. Exxon in March lowered its annual asset sales target from $5 billion to $3 billion through 2025, raising concerns that it will increasingly have to borrow to help cover dividend obligations. Shell remains committed to divest over $10 billion of assets in 2019-20 but notes that timing depends on market conditions, with $5 billion of sales needed this year. Chevron aspires to sell $15 billion-$20 billion between 2020-22, while Total has a more modest $5 billion program for 2019-20. Even before the recent oil market slump investors were retrenching, including private equity (PE) funds that have been critical buyers in earlier price downturns along with national oil companies (NOCs). The big difference now is that the long-term price outlook has changed fundamentally, and faster than before, in a world of plateauing oil demand and growing scrutiny of carbon emissions. The market turmoil has forced companies to take massive write-downs on the value of their assets, making it even harder to meet gearing reduction goals, thus increasing the need for disposals. “That means there is more demand for capital at a time when there is less available. So I think ... you will see the role of private equity more important in international oil and gas in the coming years,” says Marcel van Poecke, head of PE giant Carlyle's international energy fund. But funds are becoming more selective about which assets they take. Global oil and gas-focused funds raised just $9.8 billion in 2019, less than one-third of 2015’s record $34.6 billion, Preqin data show. And more PE money is available for midstream and infrastructure assets than for upstream so far this year. Van Poecke points to a “big shift and bifurcation in the value of certain assets. It’s not just the reserves anymore, not just the production, but also the carbon footprint.” Another important consideration will be proximity of resources to markets where demand is relatively strong. But some like heavy oil and oil sands are “less investible” because of stranded asset risk, he says (EIF Aug.19'20). Abu Dhabi sovereign investor Mubadala echoes that view. “We have an optimistic view on natural gas, low-cost oil and on the lowest-carbon resources going forward,” says Musabbeh al-Kaabi, CEO of Mubadala’s petroleum and petchem arm. Recent evidence suggests Big Oil’s asset sales could create opportunities for investors potentially less sensitive to carbon risk and keen to take advantage of a buyers’ market, such as Asian NOCs. Majors could wait for the market to strengthen into 2021 but, as some recent agreements show, sellers are sweetening terms to get transactions done. Malaysia’s state-run Petronas and Indonesia’s state Pertamina are both eyeing upstream opportunities, while Thailand’s PTT Exploration & Production has bid for a 10% stake in Oman’s giant Khazzan natural gas field in a potential $1 billion deal with BP. Global energy trader Vitol recently formed a new US upstream venture, Vencer Energy, to buy producing assets in key US basins (PIW Jul.24'20). Energy Intelligence's Research & Advisory (R&A) unit believes fire sales of the majors' assets are likely as buyers become more selective. R&A analyst Alex Martinos also expects majors to be more accommodating to help close deals with smaller, weaker players. BP for example recently revised terms with US privately owned Hilcorp Energy to push through the sale of its Alaska business (EIF Apr.29'20).The majors could also seek more creative deal structures, potentially spinning off parts of their portfolio as BP and Eni did with their Norwegian upstream assets.